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Gas Pipeline Information Disclosure and Arbitration Framework

Implementation Options Paper

March 2017

Submissions

Stakeholders are encouraged to make submissions in response to this Implementation Options Paper by 5pm (AEST) Thursday 13 April 2017.

Electronic submissions are preferred and can be sent via e-mail addressed to the Gas Market Reform Group (GMRG) at [email protected].

Stakeholders who wish to provide hard copies by post may do so by addressing their submissions to:

Gas Market Reform Groupc/o Australian Energy Market CommissionPO Box A2449Sydney South NSW 1235

The GMRG has a strong preference for public submissions, to generate full and frank debate. All stakeholder submissions will be published on the GMRG’s website at http://gmrg.coagenergycouncil.gov.au/ unless stakeholders have clearly indicated that a submission should remain confidential, either in whole or in part.

Please note that this paper is intended to identify and examine the options associated with the implementation of the information disclosure requirements and arbitration framework agreed to by the COAG Energy Council on 14 December 2016. It is intended for consultation and does not reflect the final views of the GMRG.

A further public consultation process will be held on the draft National Gas Rules which will implement the final design resulting from feedback on this paper, subject to agreement from the COAG Energy Council’s Standing Committee of Officials (SCO). Further information on the forward process is provided at 1.1.2.

For further information about Options Paper or making a submission, please contact the GMRG via email at [email protected].

The views and opinions expressed in this publication are those of the GMRG.

While reasonable efforts have been made to ensure that the contents of this publication are factually correct, the GMRG does not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

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ContentsAbbreviations..........................................................................................................

Executive Summary................................................................................................

1. Introduction................................................................................................

1.1 Background..................................................................................................

1.2 Development of the initial Rules...................................................................

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

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

2.2 Objectives of the new framework...............................................................

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

3. Information disclosure.............................................................................

3.1 Current level of information disclosure and transparency..........................

3.2 Information disclosure in other jurisdictions...............................................

3.3 Information required by shippers................................................................

3.4 Information disclosure options...................................................................

4. Arbitration mechanism............................................................................

4.1 Role of arbitration in resolving disputes.....................................................

4.2 Commercial arbitration...............................................................................

4.3 Arbitration mechanisms in other access regimes.......................................

4.4 Design components....................................................................................

4.5 Options.....................................................................................................

5. Arbitration principles.............................................................................

5.1 Pricing principles......................................................................................

5.2 Other relevant principles..........................................................................

5.3 Options for pricing principles and other principles...................................

6. Preliminary views on options and transitional arrangements...........

6.1 Preliminary views on options....................................................................

6.2 Transitional issues....................................................................................

7. Feedback sought....................................................................................

7.1 Information disclosure..............................................................................

7.2 Arbitration mechanism..............................................................................

7.3 Arbitration principles.................................................................................

7.4 Transitional issues....................................................................................

Appendix A Regulation of scheme pipelines................................................

Appendix B Dispute resolution clauses standard GTAs.............................

Appendix C State based access regimes - arbitration mechanisms..........

Appendix D International arbitration examples............................................

Appendix E Pricing principles used in other access regimes....................

Appendix F Cost standards............................................................................

AbbreviationsTerm DefinitionAAA American Arbitration Association

ACCC Australian Competition and Consumer Commission

ACICA Australian Centre for International Commercial Arbitration

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

CA Conventional Arbitration

CAAs Commercial Arbitration Acts

CCA Competition and Consumer Act 2010 (Commonwealth)

COAG Council of Australian Governments

Council COAG Energy Council

Council officials Standing Committee of Officials

CPA Competition Principles Agreement

CTA Canadian Transportation Agency

East Coast Review AEMC’s Eastern Australian Wholesale Gas Market and Pipelines Framework Review (May 2016)

ERA Economic Regulation Authority

ESCOSA Essential Services Commission of South Australia

EU European Union

Examination Dr Vertigan’s Examination of the current test for the regulation of gas pipelines (December 2016)

FERC US Federal Energy Regulatory Commission

FOA Final Offer Arbitration

GMRG Gas Market Reform Group

GTA Gas Transportation Agreement

HLA High-low arbitration

ICDR International Centre for Dispute Resolution

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

NCC National Competition Council

NEB Canadian National Energy Board

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

UNCITRAL United Nations Commission on International Trade Law

US United States

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

Executive SummaryOn 19 August 2016, the COAG Energy Council (‘the Council’) directed the Independent Chair of the Gas Market Reform Group, Dr Michael Vertigan AC, to examine the current regulatory test for the regulation of gas pipelines, in consultation with stakeholders, and provide recommendations on any further actions to the Council.

Dr Vertigan undertook the Examination of the current test for the regulation of gas pipelines (Examination) between August and December 2016 and found that the principal problem that shippers face when seeking access to pipeline services is an imbalance in bargaining power. To address this imbalance, the Examination recommended that steps be taken to reduce the information asymmetries that shippers can face in negotiations, and strengthen the negotiating position of the shippers. The specific recommendations were as follows:

1. That the disclosure and transparency of pipeline service pricing and contract terms and conditions be enhanced, including requiring the provision of information on the full range of pipeline services which are available.

2. That a framework for binding arbitration, available to all open access pipelines in the event parties are unable to reach a commercial agreement, be introduced into the National Gas Law (NGL).

On 14 December 2016, the Council endorsed these recommendations and asked Dr Vertigan to bring forward his detailed design work to enable the new framework to commence on 1 May 2017.

Council officials commenced drafting an amendment to the NGL in late 2016 and a draft of the National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017 was released for public consultation on 25 January 2017. The draft Amendment Bill is available at: http://www.coagenergycouncil.gov.au/publications/national-gas-law-amendment-package-%E2%80%93-pipelines-access-arbitration.

The draft Amendment Bill establishes the information disclosure and arbitration framework within the NGL and provides for the detail associated with the framework to be established in the National Gas Rules (NGR). The draft Bill also provides for the South Australian Minister for Mineral Resources and Energy to make the initial Rules. Once the initial rules are made, future amendments to them will proceed under the AEMC’s regular rule making framework.

The GMRG is undertaking a separate consultation process on the detail of the framework and the development of the initial Rules. This implementation options paper sets out the options available to implement the information disclosure and arbitration framework, which has been informed by a range of domestic and international examples and work carried out by Incenta Economic Consulting on the pricing principles that could be used in the arbitration mechanism. This paper also provides a preliminary indication of options preferred by the GMRG, which is intended to facilitate consultation but does not reflect the final views of the GMRG.

http://www.coagenergycouncil.gov.au/publications/national-gas-law-amendment-package-%E2%80%93-pipelines-access-arbitration


Objective of the new framework

The overarching objective of the new information disclosure and arbitration framework is to facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines by:

§ reducing the imbalance in bargaining power that shippers can face; and

§ posing a constraint on the exercise of market power by pipeline operators.

Under this new framework, the bargaining power of shippers will be increased by:

§ requiring pipeline operators to publish information that shippers require 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 NGL that would be available to parties using non-scheme pipelines as a backstop if commercial agreement cannot be reached.

Together these two elements of the framework are expected to:

§ support timely and effective commercial negotiations between shippers and pipeline operators;

§ provide a credible threat of intervention if a dispute arises, which when coupled with greater transparency on the prices charged and costs incurred, should pose a constraint on the behaviour of the pipeline operators and discourage the exercise of market power; and

§ preserve the incentives for investment and innovation in the provision of pipeline services by adopting a commercially oriented disclosure and arbitration framework.

While the new framework will allow parties to seek arbitration if a dispute arises, it is hoped that greater information disclosure and the threat of arbitration will be sufficient in most cases to encourage parties to reach a commercial agreement.

In contrast to the regulatory framework that applies to scheme pipelines, which is underpinned by economic efficiency principles, the new information disclosure and arbitration framework is intended to be more commercially focused with its overarching objective to provide for ‘reasonable and transparent’ access to non-scheme pipelines. While the objective is not economic efficiency, the expected improvements to the timeliness and effectiveness of commercial negotiations and the behaviour of pipeline operators, can 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 National Gas Objective and contribute to the Council’s Australian Gas Market Vision.

Information disclosure requirements

During the Examination, concerns were raised by a number of shippers about the information asymmetries they can face in negotiations with pipeline operators and the detrimental effect this can have on their bargaining power and ability to readily identify any attempted exercise of market power.1 To address this imbalance and facilitate more timely and effective negotiations between shippers and the operators of non-scheme pipelines, the Examination recommended that steps be taken to increase the level of disclosure and transparency of:2

§ the full range of services offered by the pipeline;

§ the price and non-price terms and conditions on which services will be offered;

§ the methodologies used by the pipeline operator to determine prices; and

§ the costs incurred by the pipeline operator in providing the services so that shippers can assess the reasonableness of the offer.

To give effect to this recommendation, a new information disclosure head of power will be introduced into the NGL that requires pipeline operators to disclose the information specified in initial Rules that will be developed through this process.

The GMRG has 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, but no additional information to inform their assessment of the reasonableness of prices.

§ Option 2: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline and verified financial reports and demand information that shippers can use to assess the reasonableness of the price offered (“Option 1 and financial reporting”).

§ Option 3: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline, financial reports and detailed cost, demand and financial information that shippers can use to assess the reasonableness of the price offered (“Option 2 and detailed cost information”).

§ Option 4: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline, verified financial reports and demand information and on the prices paid by shippers on the pipeline that shippers can use to assess the reasonableness of the price offered (“Option 2 and price reporting”).

§ Option 5: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline as well as verified financial reports, detailed cost, demand and financial information and information on the

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

2 Ibid, pp. 13-14.

prices paid by shippers on the pipeline that shippers can use to assess the reasonableness of the price offered (“Option 3 and price reporting”).

These options can be viewed as being on a spectrum, with Option 1 providing for the disclosure of a base level of information required by shippers when considering whether to seek access, while Option 5 provides for the disclosure of the maximum amount of information. Common to each of these options is 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 is therefore whether pipeline operators are also required to publish financial reports, detailed and disaggregated cost, demand and financial information and/or the prices paid by shippers under existing contracts to enable shippers to assess the reasonableness of the offer.

Arbitration mechanism

The Examination concluded that the most effective way to address the negotiating imbalance that shippers can face is to institute a credible threat of intervention in the event commercial negotiations fail. When coupled with appropriate information disclosure, the threat of intervention should incentivise parties to reach agreement through commercial negotiations and thus rarely be triggered.

While the arbitration mechanism is intended to have attributes of commercial arbitration, it is to be provided for by a statutory instrument: the NGL and NGR. Consideration has therefore been given to both commercial arbitration mechanisms and the arbitration mechanisms used in other statutory instruments when developing the options for the new arbitration mechanism.

To reflect the key characteristics of the arbitration mechanism outlined by the Examination and the draft Amendment Bill, the GMRG has proposed a range of implementation approaches to particular design components in the initial Rules, including in relation to:

§ Access proposals.

§ Protection of existing contractual rights.

§ Safeguards to avoid distorting investment.

§ Oversight by the Australian Energy Regulator (AER).

§ Selection of the arbitrator.

§ Binding nature of the arbitration.

§ Costs.

§ Type of services eligible to be arbitrated.

§ Exemption framework.

§ Termination of arbitration.

§ Correction of errors.

The GMRG has 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 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.

Arbitration principles

Irrespective of the form the new arbitration mechanism takes, the arbitrator will require some guidance on the matters it is to take into account when making its determination. This guidance will be provided through the inclusion of pricing and other principles in the initial Rules.

Well-specified principles will provide more certainty as to the outcome of an arbitration, and in doing so increase the likelihood of parties reaching a commercial agreement without recourse to arbitration. If the principles guide or bind the arbitrator as to the issues it may consider and/or the approach to be used when considering a particular issue, they may also affect the extent to which the arbitration mechanism alters the negotiation position between the parties. Similarly, the guidance or instructions provided to the arbitrator may influence the risk as to whether a determination may have an adverse impact on investment.

It is with this in mind that the GMRG has considered the pricing and other principles that could be included in the initial Rules. This consideration has been informed by a review of the pricing principles that have been adopted in other access regimes, which range from relatively high level principles that accord the arbitrator with broad discretion to more prescriptive principles that limit the arbitrator’s discretion. The consideration has also been informed by some initial stakeholder feedback on the way in which an arbitrator should assess whether a price offered by a pipeline operator is reasonable, which focused on a comparison of the offer with either:

§ the prices payable for comparable services; or

§ the costs the pipeline operator incurs in providing the service.

The GMRG has identified a range of tests that could be used by an arbitrator to assess the reasonableness of the price offered by a pipeline operator if a decision is made that the scope of the arbitrator’s discretion should be more limited. It has also identified principles that could be used by an arbitrator when assessing the price of services that are derivatives of, or ancillary to, firm transportation services.

In addition to pricing principles, the GMRG has identified a number of other principles that could be included in the initial Rules to provide the arbitrator with additional guidance when making its determination, such as:

§ 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.

The options that the GMRG has identified for the pricing and other principles are:

§ Option 1: Under this option the arbitrator would be required to consider whether the price offered by the pipeline operator is reasonable having regard to the set of other principles outlined above.

§ Option 2a: Under this option, the pricing principles would require the arbitrator to assess the reasonableness of the offer by comparing it with the prices payable for comparable pipeline services and it would be left to the arbitrator to determine how to carry out the assessment. Separate pricing principles would also be included to deal with derivative and ancillary services. These pricing principles would be supplemented by the set of other principles outlined above.

§ Option 2b: Under this option, the pricing principles would require the arbitrator to assess the reasonableness of the offer by comparing it with the actual costs (including a commercial rate of return) the pipeline operator incurs in providing the service. It would be left to the arbitrator to determine how to carry out the assessment. Separate pricing principles would also be included to deal with derivative and ancillary services. These pricing principles would be supplemented by the set of other principles outlined above.

§ 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 on how the relevant test is to be applied. The pricing principles could also be supplemented by guidelines prepared by the AER.

GMRG’s preliminary views

Table 1 sets out the GMRG’s preliminary view on the package of information disclosure requirements, arbitration mechanism and pricing principles options that should be implemented, which has been developed having regard to the overarching objective of the new framework. The inclusion of the GMRG’s preliminary views in this paper is intended to assist stakeholders to respond to this paper and should not be interpreted as concluded positions of the GMRG.

Table 1: Preliminary views of the GMRGInformation disclosure and arbitration framework

Overarching objective

To facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines by: reducing the imbalance in bargaining power that shippers can face; and pose a constraint on the exercise of market power by pipeline operators.

Outcomes sought

§ Provide parties with an incentive to reach agreement through commercial negotiations and to only have recourse to the arbitration mechanism if there is a dispute that cannot be resolved through commercial negotiation.

§ Provide for a commercially focused framework that can be applied to the broad range of services offered by pipelines, including those that can be provided using the existing capacity and those that require the pipeline to be augmented.

§ Preserve incentives for investment and innovation in the provision of pipeline services. § Not impose an excessive burden on parties, in terms of time and/or cost.

Information disclosure requirements Arbitration mechanism Arbitration principles

PurposeReduce 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 (see section 3.4.2)Non-scheme pipeline operators would be required to disclose on their website:1. The base level of information that shippers require

when considering whether to seek access to a pipeline.

2. 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 (see section 4.5.3)

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 (see section 5.3.3)

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

As this table highlights, the GMRG is of the view that the following package of options would be most likely to facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines:

§ Information disclosure: Option 2 – Disclosure of the base level of information that shippers require when considering whether to seek access and the publication of verified financial reports that shippers can use to carry out a high level assessment of the reasonableness of the offer.

§ Arbitration mechanism: Option 3 - Conventional Arbitration with enhanced procedural protections and partial transparency.

§ Arbitration principles: Option 2b - Pricing principles based on the actual cost of service provision (including a commercial rate of return) supplemented by a number of other principles (including principles on how the prices of derivative and ancillary services should be determined).

The clear and consistent message from shippers is the perception that the prices being charged for pipeline services exceed the cost of provision. Having regard to this feedback, the access regimes in other industries and jurisdictions, and the recommendations contained in both the Examination and the ACCC’s Inquiry, the GMRG is of the view that disclosure of some form of cost or financial information is required to enable shippers to assess whether the price offered by a pipeline operator is reasonable. Apart from reducing the information asymmetries faced by shippers in negotiations, the GMRG expects greater transparency in this area to impose more discipline on pipeline operators when determining the price of services and discourage exercises of market power.

The GMRG is also of the view that if a pricing dispute arises, the arbitrator should be required to assess the reasonableness of the price offered by the pipeline operator by reference to the costs the pipeline operator actually incurs in providing the service (including a commercial rate of return). The arbitrator would be left to decide upon the methodology used to determine the reasonableness of the price offered relative to costs. The pricing principles for derivative and ancillary services would be based on the opportunity cost / benefit of the service relative to the main pipeline service (having regard to any effect on costs and/or capacity) and, in the case of derivative services, delivering a reasonable contribution to joint and common costs. The pricing principles would also be supplemented by a number of other principles (as outlined above) to provide the arbitrator with additional guidance when making its determination.

In addition to the principles outlined above, the GMRG proposes a number of safeguards be included in the Rules to ensure pipeline operators cannot be required to carry out an augmentation to the pipeline unless the shipper funds the augmentation in its entirety, and it is technically and economically feasible and consistent with the safe and reliable operation of the pipeline.

While the financial information that pipeline operators would be required to make available under Information disclosure: Option 2 will provide an important input to the arbitration process, it is not clear to the GMRG that the information provided with regard to costs will always be sufficient to enable an arbitrator to effectively apply

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the pricing principles.3 The GMRG is therefore of the view that the arbitrator should be provided with an information gathering power in the Rules, which could be used if the arbitrator believes the financial reports or other information voluntarily provided by the pipeline operator, is insufficient to apply the pricing principles.

In terms of the form of the arbitration mechanism, the GMRG is of the view that conventional arbitration, with enhanced procedural protections and partial transparency, appropriately balances the need to provide an arbitration mechanism that has adequate safeguards to avoid distorting investment and provides procedural protections to ensure it is not gamed by the parties with the most resources.

The GMRG is also of the view that the arbitrator should be permitted to seek administrative or technical support from the AER in undertaking the arbitration. This recognises that the AER has administrative oversight of the arbitration mechanism as well as relevant experience and expertise in the gas pipeline sector. This should help facilitate the arbitration being completed within the three month timeframe envisioned.

Further, 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 publication of information on arbitrators that have conducted arbitrations in relation to non-scheme pipelines may also assist other parties in selecting an arbitrator with relevant experience.

Together, the package of options outlined above is expected to:

§ be fit for purpose, targeted and proportionate to the imbalance in bargaining power that it is intended to address and not to impose an excessive burden on non-scheme pipeline operators;4

§ result in the most appropriate allocation of investment risks and accountability;5 and

§ provide pipeline operators and shippers with sufficient clarity about how the new framework will operate, while also ensuring there is sufficient flexibility in the new arrangements to deal with any changes that may occur in the future.6

The package of options is also expected to promote the NGO in a more cost-effective and targeted manner than any of the other options set out in this paper and to make a greater contribution to the Council’s Vision and the next phase of gas market reforms.

3 For example, if the dispute relates to an augmentation, then historic financial reports would not provide the arbitrator with the cost information it requires.

4 For example, by selecting the most cost-effective information disclosure option.5 For example, by not allowing an arbitrator to direct the pipeline operator to augment the

pipeline unless the augmentation is to be underwritten by the shipper.6 For example, by specifying the use of the actual cost standard in the pricing principles but

not prescribing how this standard is to be applied.

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Transitional arrangements

Reflecting Council’s decision that the new framework should be in place as soon as possible, the initial Rules are intended to be developed by mid-July and to be effective as soon as possible thereafter.7

Once the initial Rules are implemented, the following would need to occur:

(1) Pipeline operators would need to publish on their website the base level information required by shippers.

(2) Pipeline operators would need to start publishing verified financial reports on an annual basis.

(3) A number of guidelines and guides would need to be prepared, including:

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

(b) a guide for the arbitrator on the arbitration process; and

(c) a guide for disputing parties on the arbitration process.

If the initial Rules are assumed to be in effect from 1 August 2017, pipeline operators should be in a position to publish the information set out in (1) on their websites by 1 January 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.

Rather than delaying the commencement of the arbitration mechanism until the financial reports are available, the GMRG suggests that:

§ the mechanism come into effect at the same time pipeline operators are expected to publish the base level information required by shippers (i.e. 1 January 2018); and

§ the arbitrator be provided with an information gathering power to require the pipeline operator to provide the arbitrator with any financial and cost information it requires.8

The table below provides an indication of the proposed timelines for the implementation of the new framework.

As this table highlights, the commencement date for financial reporting by pipeline operators is inextricably linked to the publication of the financial reports guideline. Given the potential for any delays in the development of this guideline to affect the

7 The initial Rules for the new framework will be made by the South Australian Minister for Mineral Resources and Energy.

8 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.

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operation of the new framework, the GMRG is looking at ways to accelerate the guideline development process. One option the GMRG is considering would be to commission a consulting firm with expertise and experience in financial reporting requirements to prepare the initial draft, in conjunction with the GMRG and the AER and for an expedited consultation process to be employed. If this option was implemented, then it is possible that financial reporting could commence as early as 30 October 2018 for the first half yearly financial report.

Table 2: Proposed implementation time lines

Date Process

1 August 2017 § New Rules come into effect.§ GMRG in consultation with the AER progresses work on financial

report guidelines§ AER commences work on the arbitration process guides.

1 January 2018 § Pipeline operators publish base level information required by shippers on their websites.

§ AER publishes its arbitration process guide for the arbitrator and disputing parties (or as an interim measure publishes information on the process on its website).

§ Arbitration mechanism commences.

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).

Forward process

The GMRG is interested in obtaining stakeholder feedback on the information disclosure and arbitration framework design, including the proposed approaches and implementation options presented. A list of questions is provided in Chapter 7 of the paper to assist stakeholders with their responses.

Stakeholders are encouraged to make submissions in response to this Implementation Options Paper by 5pm (AEST) Thursday 13 April 2017. Electronic submissions are preferred and can be sent via e-mail addressed to the Gas Market Reform Group (GMRG) at [email protected].

In addition to providing a written submission, stakeholders will have an opportunity to discuss their early views at a series of roundtable discussions, by industry sector, to be held the week of 3 April 2017.

Feedback received during the consultation process will inform the final design, which will be presented to Council officials for their consideration. Following approval of the design, a draft set of Rules will be developed and released for public consultation, inviting stakeholder submissions.

A final set of Rules, taking into consideration feedback received on the draft Rules, will then be finalised and considered by the Council. It is proposed that Energy Ministers consider the Rules at their mid-year meeting, scheduled for 14 July 2017.

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1. IntroductionGetting the regulatory settings for gas pipelines right is important to promote an efficient transportation sector with competitive prices and more efficient and liquid gas markets. In a gas market characterised by a tighter supply and demand balance, continued investment in pipelines and related services will be needed to provide flexibility and choice for consumers.

Gas customers increasingly require more flexible transportation services, such as bidirectional and backhaul transportation services, storage (park and loan services) and a range of ancillary services (for example, redirection services, compression, in-pipe trade services and capacity trading services). Some customers may also require existing pipelines to be expanded, interconnected or converted into bi-directional pipelines. More flexible and efficient pipeline services are also an essential consideration in energy security planning and ensuring gas powered generation is able to provide capacity when required to balance the intermittent nature of renewable electricity sources.

Most pipeline operators have responded well to the changes currently underway in the market, undertaking necessary investments in a timely manner and offering more flexible services to meet the changing needs of some users and producers.9 Nonetheless, some market participants continue to express concerns about the significant market power wielded by some pipeline operators and the detrimental effects this can have on the efficiency of the gas market and related markets.

1.1 Background

On 19 August 2016, the Council of Australian Governments (COAG) Energy Council (the Council) released a comprehensive Gas Market Reform Package (Package). The Package responded to the findings and recommendations of the Australian Competition and Consumer Commission’s (ACCC) Inquiry into the East Coast Gas Market (Inquiry) and the Australian Energy Market Commission’s (AEMC) Eastern Australian Wholesale Gas Market and Pipelines Framework Review: Stage 2 Final Report (East Coast Review). Comprising 15 reform measures across four priority areas (gas supply, market operation, gas transportation and market transparency), the reform package is designed to facilitate the achievement of the Council’s Australian Gas Market Vision (Vision):

‘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’.

Further, Ministers agreed to the establishment of the Gas Market Reform Group (GMRG), to lead the design, development and implementation of gas market reform measures in response to the strategic policy direction provided by the Council. The

9 ACCC, Inquiry into the East Coast Gas Market Report, April 2016, p 8.

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GMRG is led by Dr Michael Vertigan AC, the Independent Chair, and is expected to provide technically feasible and commercially viable options for consideration by the Council within the broader policy context.

The GMRG is responsible for progressing a number of reforms, including:

§ the development of the new information disclosure and arbitration framework;

§ the transportation (pipeline and hub services) capacity trading related reforms, which include the development of:

o standardised terms and conditions for transportation contracts to make capacity products more fungible and to facilitate more capacity trading;

o a day-ahead auction of contracted but un-nominated pipeline and hub services capacity; and

o a capacity trading platform(s) that provides for exchange based trading of commonly traded services and a listing facility for other services.

§ market transparency reforms, including the development of terms of reference for the AEMC’s biennial review on the growth in liquidity in wholesale gas and pipeline capacity trading markets; and

§ wholesale gas market related reforms, which primarily relate to progressing any reforms to the Southern Hub and Victorian Declared Wholesale Gas Market (DWGM) that the AEMC recommends at the completion of its review.

Further information on the Council’s Gas Market Reform Package is available at: http://www.coagenergycouncil.gov.au/current-projects/gas.

In the latter stages of drafting this options paper, 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. Of particular relevance to this process are the market transparency and capacity trading reform measures, which the GMRG will be working on alongside a number of other agencies. The GMRG intends to take these measures into account when it develops its final design recommendations on the new information disclosure and arbitration framework.

1.1.1 Examination of Current Test for the Regulation of Gas Pipelines

Reform Measure 4 of the Package directed the Independent Chair of the GMRG to:

‘Examine the current regulatory test for the regulation of gas pipelines, in consultation with stakeholders, and provide recommendations on any further actions to the Energy Council, including potentially replacing the test’.

This reform measure was prompted by the ACCC Inquiry, which, amongst other things, found that while transmission pipelines in eastern Australia have responded well to the changes underway in the market, a large number of established pipelines were engaging in monopoly pricing, to the detriment of consumers and economic efficiency. The ACCC also found that the ability and incentive of established pipelines to engage in this behaviour was not being effectively constrained by

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http://www.coagenergycouncil.gov.au/current-projects/gas

competition from other pipelines, competition from alternative energy sources, the countervailing power of shippers or regulation or the threat of regulation.

Dr Vertigan undertook the Examination of the current test for the regulation of gas pipelines (Examination) between August and December 2016, which included significant consultation with interested stakeholders.10

1.1.1.1 Findings and recommendations

Throughout these consultations, shippers made clear their belief that pipeline operators are using their market power to engage in monopoly pricing and that this is operating to the detriment of efficient outcomes in upstream and downstream markets. The Examination also found evidence of this behaviour and noted that in some instances it appeared to be resulting in inefficient outcomes that did not promote the National Gas Objective (NGO),11 or facilitate the achievement of the Council’s Vision.

The initial presumption and widespread expectation of the industry was that to address this problem, the focus of the Examination would be on the appropriateness of the existing regulatory test and whether, and how, it should be changed. However, submissions and consultations indicated that the principal problem is that shippers seeking access to pipeline services have unequal levels of bargaining power and access to information. The Examination therefore focused on the most effective and least onerous ways to address this negotiating imbalance, with the objective of delivering more competitive outcomes in the market for pipeline services.

It was with this in mind that the Examination recommended that steps be taken to reduce the information asymmetry that shippers can face in negotiations, and strengthen the negotiating position of the shippers. The specific recommendations were as follows:

§ Recommendation 1: That the disclosure and transparency of pipeline service pricing and contract terms and conditions be enhanced, including requiring the provision of information on the full range of pipeline services which are available or sought (not solely focused on forward haul services).

§ Recommendation 2: That a framework for binding arbitration, available to all open access pipelines in the event parties are unable to reach a commercial agreement, be introduced into the National Gas Law (NGL).

The first of these recommendations is expected to enable shippers to make more informed decisions about whether to seek access and to better assess the 10 A consultation paper was released on 4 October 2016 seeking stakeholder feedback, with thirty

submissions received (see www.coagenergycouncil.gov.au for public submission). During the week of 24 October 2016, a series of sector-based roundtables were also conducted with producers, pipeline operators, retailers, large users, industry associations and economic consultants. Bilateral meetings were also held.

11 The National Gas Objective is set out in section 23 of the NGL and states that the objective of the NGL is to

‘…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’.

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reasonableness of the prices and other terms offered. It is therefore expected to provide shippers seeking access to pipeline services with an improved ability to undertake timely and effective negotiations. Greater transparency in this area may also pose some additional discipline on pipeline operators when determining the prices of their services.

The second recommendation, on the other hand, is expected to ensure that the focus on commercial negotiation remains and to provide shippers with a credible threat if a pipeline operator attempts to exercise its market power. In contrast to a regulatory solution, this commercially focused approach is expected to avoid the time delays and the high costs that are usually associated with formal regulatory processes, which is consistent with the views of the majority of market participants that have little appetite for more onerous regulatory solutions. The extent to which the arbitration mechanism will need to be triggered will, in part, depend on the efficacy of the information disclosure requirements. That is, if shippers have access to the information they require to assess the reasonableness of offers and the parties negotiate in good faith, then resort to arbitration should rarely be required.

Together these two recommendations are expected to reduce the imbalance in negotiating power and increase transparency in the market, and in so doing facilitate more timely and effective commercial negotiations and pose a constraint on the exercise of market power by pipeline operators.

In an environment of significant change for the Australian gas market, the regulatory framework needs to be flexible enough to deal with changing market circumstances. The inclusion of the new information disclosure and arbitration framework will provide a means of overcoming impasses in commercial negotiation and provide the flexibility required to support the transition to a more competitive and liquid gas market. The emphasis placed on commercial negotiations and a commercially focussed arbitration mechanism, is intended to continue to support investment in this sector.

In addition to the recommendations outlined above, the Examination also contained the following recommendations:

§ Recommendation 3: That the GMRG be tasked with developing a detailed design of the disclosure and transparency requirements and of the arbitration framework, after consultation with industry, other stakeholders, the ACCC, the AER and the AEMC, with recommendations to be considered by the COAG Energy Council in mid-2017.

§ Recommendation 4: That no change be made to the current coverage test at this stage. The appropriateness of amending the coverage test should be reviewed within five years after the arbitration framework is operational.

On 14 December 2016, the Council endorsed these recommendations and asked Dr Vertigan to bring forward his detailed design work to enable the new framework to commence on 1 May 2017. Further, Energy Ministers agreed that Council officials should review the subsequent measures two years following implementation.

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1.1.2 National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017

To give effect to the recommendations outlined above, new heads of power need to be introduced into the NGL. Reflecting Ministers 1 May 2017 timeframe, Council officials commenced drafting an amendment to the NGL in late 2016 and the draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017 (‘the draft Amendment Bill’) was released for public consultation on 25 January 2017.12 The draft Amendment Bill is available at: http://www.coagenergycouncil.gov.au/publications/national-gas-law-amendment-package-%E2%80%93-pipelines-access-arbitration.

The draft Amendment Bill establishes the information disclosure and arbitration framework within the NGL and provides for the detail associated with the framework to be established in the National Gas Rules (NGR).

Stakeholders were invited to provide written submissions by close of business (AEDT) on Wednesday, 8 February 2017, and were encouraged to review and comment on all aspects of the draft Amendment Bill, and to consider the consultation questions posed within the attached Gas Market Reform Bulletin.

Twelve submissions were received from pipeline operators, shippers, large energy user associations and other interested parties. This feedback has been considered by Council officials and, where appropriate, reflected in the final Bill that was agreed to by the Council at its 17 February 2017 meeting. The final Amendment Bill is expected to be tabled in the South Australian Parliament in the sitting period commencing on 28 March 2017.

Importantly, the Amendment Bill does not require the adoption of a particular information disclosure or arbitration framework. These details will instead be developed through this consultation process.

1.2 Development of the initial Rules

Further detail on the information disclosure and arbitration framework will be established in the NGR. The draft Amendment Bill provides for the South Australian Minister for Mineral Resources and Energy to make these initial rules. Once the initial rules are made, future amendments to them will proceed under the AEMC’s regular rule making framework.

The GMRG is undertaking a separate consultation process on the detail of the framework and the development of the initial Rules. This paper examines the options available to implement the information disclosure and arbitration framework agreed to by the Council on 14 December 2016. While the paper provides an indication of the GMRG’s preliminary view on the options, it is intended for consultation and does not reflect the final views of the GMRG.

12 The NGL is enacted as a law of South Australia. Each of the other jurisdictions in which the NGL applies has enacted legislation applying the NGL in its jurisdiction.

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1.2.1 Scope of the paper

As outlined in the Examination report and agreed by the Council, the existing regulatory arrangements, including the coverage test under the NGL, are not being amended or replaced. Rather, the information disclosure and arbitration framework will operate alongside the existing coverage and regulatory arrangements.

Figure 1.1 on the following page provides an indication of where the information disclosure and arbitration framework sits within the spectrum of access to pipeline services, ranging from commercially-oriented outcomes to full regulation. Further detail on the way in which covered (scheme) pipelines are regulated can be found in Appendix A.

As reflected in the draft Amendment Bill, the information disclosure and arbitration framework will only apply to distribution and transmission pipelines that are not subject to either full or light regulation (also referred to as ‘scheme pipelines’). The application of the options outlined in this paper will therefore be limited to ‘non-scheme pipelines’ (subject to any potential exemptions).

Pipelines subject to a 15-year no-coverage determination fall within the definition of a ‘non-scheme pipeline’. While the Examination did not propose any change to the existing 15-year no-coverage period, it observed that negotiations involving parties to foundation contracts relating to services not covered in those contracts, or involving a new party, should be subject to the arbitration framework.13 The appropriateness of providing for a potential exemption from the information disclosure and arbitration framework to pipelines subject to a 15-year no coverage determination is considered in sections 3.4.6.1, 4.4.2.2 and 4.5.

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 suggests that they be considered by the AEMC as part of its Review of Parts 8-12 of the NGR (see section 1.2.1.1).

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 scheme pipelines is 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 therefore suggests that it be considered by Council officials when they carry out their review of the effectiveness of the measures, which is expected to occur two years after the new framework is implemented (see section 1.2.1.2).


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Figure 1.1: Spectrum of access regimes applying to pipelines

Notes: * Subject to exemptions.

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1.2.1.1 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 terms of reference for this review are currently being developed and the review is expected to commence in April 2017.

1.2.1.2 Council officials’ 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.

1.2.2 Structure of the paper

This implementation options paper examines the detailed design components available for the implementation of the information disclosure and arbitration framework. The paper commences by outlining the overarching objective of the new information disclosure and arbitration framework and the assessment framework

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that has been developed to assess the final options. It then sets out the design options for the information disclosure requirements, the arbitration mechanism and the principles that will guide the arbitrator’s decision making and explores the advantages and disadvantages associated with these options.

The paper then provides an indication of the GMRG’s preliminary view on the options and sets out a list of questions that the GRMG would like feedback on. A range of design options have been considered in this context, which have been informed by domestic and international experience in relation to gas pipeline access, infrastructure access more generally and commercial dispute resolution.

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

§ the term ‘shipper’ has been used to refer to existing and prospective shippers and is also used interchangeably with the term user; and

§ the term ‘pipeline operator’ has been used interchangeably with the term ‘service provider’; 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 could play under the new framework.

1.2.3 Forward process

The GMRG is seeking written feedback from stakeholders on the options presented in this paper, including the in response to the questions set out in Chapter 7, by 5pm (AEST) Thursday 13 April 2017. In addition to providing a written submission, stakeholders will have an opportunity to present their views at a series of roundtables by sector to be held in early April 2017. Roundtables will be held by industry sector, including for gas producers, pipeline operators, consumer groups, large gas users and gas retailers.

Stakeholders are encouraged to express their interest by contacting [email protected] should they wish to attend a roundtable.

Feedback received during the consultation process will inform the final design, which will be presented to Council officials for their consideration. Following approval of the design, a draft set of Rules will be developed and released for public consultation, inviting stakeholder submissions.

A final set of Rules, taking into consideration feedback received on the draft Rules, will then be finalised and considered by the Council. It is proposed that Energy Ministers consider the Rules at their mid-year meeting, scheduled for 14 July.

Table 1.1: TimeframesDate Process20 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

May 2017 Draft Rules released for public consultation

July 2017 Draft Rules presented to Energy Council Ministers

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2. Objective of the new frameworkBefore outlining the design options for the various elements of the new information disclosure and arbitration framework, it is worth taking the time to set out:

§ the problems that were identified through the Examination, which have formed the basis for the new information disclosure and arbitration framework;

§ the objectives of, and outcomes sought by, the new framework; and

§ the assessment framework that will be used to assess the final options for the information disclosure and arbitration framework.

These matters were considered during the development of options for inclusion in this paper and will be further considered and applied, informed by stakeholder feedback, in making a recommendation on the final design to Council officials.

2.1 Problem to be addressed by the new framework

One of the key observations of the Examination was that the operators of existing pipelines have market power and that, in some instances, the exercise of market power is resulting in inefficient outcomes that do not promote the NGO or facilitate the achievement of the Council’s Australian Gas Market Vision.14 The Examination also observed that the ability of pipeline operators to wield their market power, coupled with the information asymmetries that shippers can face in their negotiations, was resulting in a significant imbalance of bargaining power between pipeline operators and shippers in their negotiations.15

These observations were informed by the experience that a large number of shippers claim to have had when negotiating with pipeline operators, with shippers that participated in the Examination’s consultation process making clear their belief that the majority of pipeline operators have market power and are using that power to engage in monopoly pricing.16

Elaborating further on this issue, shippers noted that in those locations that are only serviced by a single pipeline, the market power wielded by pipeline operators can be quite substantial and result in prices being set at levels that are far higher than what they would be in a competitive market or under regulation, but not so high as to force the shipper to exit the market.17 Shippers also noted 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

14 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, pp. 9-10.

15 Ibid, p. 12.16 Ibid, pp. 10 and 78.17 Ibid, p. 78.18 Ibid, p. 10.

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§ the existing test for regulation does not pose a credible threat to pipeline operators and is not therefore constraining their behaviour.19

The Examination’s observations were also informed by:

§ independent analysis carried out by JP Morgan’s Equity Research Team, which found the returns being earned by one pipeline operator20 were double that of the average regulated electricity network operator;21,22 and

§ a number of examples of prices being offered or charged by existing pipelines, which suggested the operators were exerting their market power.23

The Examination’s observations were broadly in line with the findings of the ACCC’s Inquiry, which recommended that changes be made to the test for regulation to pose a constraint on the behaviour of pipeline operators with market power. While this solution was tested with stakeholders during the Examination, it became clear that the majority of shippers were not looking for a traditional regulatory solution.24 Rather, most shippers wanted to find a way to reduce the imbalance in bargaining power they can face when negotiating with pipeline operators.25

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:26

§ 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 NGL that would be available to parties using non-scheme pipelines as a backstop if commercial agreement cannot be reached.

19 Ibid, p. 80.20 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.


22 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.


24 It is worth noting in this context that like the ACCC, the Examination found that experience with the existing regulatory test confirmed that it is difficult to satisfy, especially in relation to criterion (a), and did not therefore constitute a credible threat to the market power of a pipeline operator.

25 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14 December 2016, p. 78.,

26 Ibid, pp. 13-15.

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Together these two recommendations are expected to:

§ support timely and effective commercial negotiations between shippers and pipeline operators;

§ provide a credible threat of intervention if a dispute arises, which when coupled with greater transparency on prices and costs, 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 pipeline services by adopting a commercially oriented disclosure and arbitration framework.

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.

In contrast to the regulatory framework that applies to scheme pipelines, which is underpinned by economic efficiency principles, the new information disclosure and arbitration framework is intended to be more commercially focused and to provide ‘reasonable and transparent’ access to non-scheme pipelines as its overarching objective.

While the objective of the new framework is not economic efficiency, the expected improvements to the timeliness and effectiveness of commercial negotiations and the behaviour of pipeline operators, can 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.

These improvements can also be expected to contribute to the Council’s Vision and the following work streams and outcomes (see Box 2.1) that Council agreed to pursue in the next phase of gas market reform and development:27

§ Stream 2: Enhancing transparency and price discovery:

o Provision of accurate and transparent market making information on pipeline and large storage facilities operations and capacity, upstream resources, and the actions of producers, export facilities, large consumers and traders.

§ Stream 3: Improving risk management

o Access to regional demand markets through more harmonised pipeline capacity contracting arrangements which are flexible, comparable,

27 COAG Energy Council, Australian Gas Market Vision, December 2014.

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transparent on price, and non-discriminatory in terms of shippers’ rights, in order to accommodate evolving market structures.

§ Stream 4: Removing unnecessary regulatory barriers and improving existing regulatory measures:

o Regulation of gas supply and infrastructure is appropriate and enables participants to pursue investment opportunities, in response to market signals, in an efficient and timely manner.

Box 2.1: Council’s Vision for the Australian gas market28

The Council released its Vision for the Australian gas market in December 2014.

Briefly stated, 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.

At the time it released the Vision, the Council also noted that it would pursue the following outcomes in the next phase of gas market reform and development:

§ Stream 1: Encouraging competitive gas supply:o Improvements to the regulatory and investment environment so that gas supply

is able to respond flexibly to changes in market conditions.

o A "social licence" for onshore natural gas development achieved through inclusion, consultation, improving the availability and accessibility of factual information relating to resources projects, and rigorous science to ensure that communities concerns are addressed.

§ Stream 2: Enhancing transparency and price discovery:o Provision of accurate and transparent market making information on pipeline and

large storage facilities operations and capacity, upstream resources, and the actions of producers, export facilities, large consumers and traders.

o Increased flexibility and opportunity for trade in pipeline capacity.

o A competitive retail market that will provide customers with greater choice and large users with enhanced options for self-supply and shipment.

§ Stream 3: Improving risk management:o Liquid and competitive wholesale spot and forward markets for gas that provide

tools for participants to price and hedge risk.

o Access to regional demand markets through more harmonised pipeline capacity contracting arrangements which are flexible, comparable, transparent on price, and non-discriminatory in terms of shippers’ rights, in order to accommodate evolving market structures.

o Harmonised market interfaces that enable participants to readily trade between locations and find opportunities for arbitrage and trade.

o Identified development pathways to improve interconnectivity between supply and demand centres, and existing facilitated gas markets, which enable the enhanced trading of gas.

28 Ibid.

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§ Stream 4: Removing unnecessary regulatory barriers:o Regulation of gas supply and infrastructure is appropriate and enables

participants to pursue investment opportunities, in response to market signals, in an efficient and timely manner.

2.2 Objectives of the new framework

As the discussion in the preceding section highlights, the overarching objective of the new framework is to facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines by:

§ reducing the imbalance in bargaining power that shippers can face; and

§ posing a constraint on the exercise of market power by pipeline operators.

The term ‘commercial negotiations’ is italicised in the preceding paragraph because, while the new framework will allow parties to seek arbitration if a genuine dispute arises, it is hoped that greater information disclosure and the threat of arbitration will be sufficient in most cases to encourage parties to reach a commercial agreement.

Some of the specific outcomes that are being sought under the information disclosure and arbitration framework are summarised in the table below.

Table 2.1: Outcomes sought under the new framework

Overall frameworkIn general, the new information disclosure and arbitration framework should:§ Provide parties with an incentive to reach agreement through commercial negotiations

and to only have recourse to the arbitration mechanism if there is a dispute that cannot be resolved through commercial negotiation.



Information disclosureThe purpose of the information disclosure requirements is to reduce the degree of information asymmetry that shippers can face in negotiations and, in so doing, facilitate more timely and effective negotiations. If the disclosure is sufficiently detailed, then it should limit the reliance that needs to be placed on the arbitration mechanism and allow shippers to more readily identify any attempted exercise of market power. Requiring pipeline operators to publish more detailed information will, however, impose costs on pipeline operators. An appropriate balance must therefore be found in terms of the level of information to be disclosed. To achieve this objective, the information disclosure requirements should: § Provide shippers with the information they require when:

– considering whether to seek access to a pipeline; and – assessing the reasonableness of a pipeline operator’s offer.

§ Be targeted, proportionate and not impose an excessive burden on pipeline operators.

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Arbitration mechanismThe purpose of introducing binding commercial arbitration is to provide shippers with a credible threat of intervention and to constrain the behaviour of pipeline operators during commercial negotiations. 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.

The arbitration mechanism should also be as simple as possible and clear to parties considering access to arbitration. While it is not the intention to encourage parties to access arbitration, in the event it is relied upon, parties should have a clear understanding of the process involved and the requisite timeframes. Further, parties should have adequate understanding and information to be able to properly consider the risks and likely costs associated with arbitration. It is recognised that even with additional information, as outlined above, there will still be a disparity between the resources and knowledge held by the pipeline operator and the shipper. It is important the arbitration framework does not leave the shipper at a significant disadvantage during the arbitration process. The form of arbitration implemented needs to provide sufficient countervailing pressure from users without encouraging unnecessary arbitration.To achieve these objectives, the arbitration mechanism should:§ encourage parties to reach a commercial agreement and discourage overreliance on the

arbitration mechanism;§ provide a credible threat of intervention by an independent arbitrator if a dispute arises

that cannot be resolved through commercial negotiation;§ provide for expeditious dispute resolution that can be completed in approximately three

months;§ provide for a binding determination if the shipper wishes to enter a contract;§ limit the opportunities for gaming by parties;§ minimise the costs associated with the arbitration;§ provide a simple and clear process for parties to seek arbitration;§ provide the arbitrator with clear principles on the matters to be taken into account when

making its decision, including pricing and other principles; and§ not deprive other shippers of pre-existing rights.

2.3 Assessment framework

There are, as noted in the introduction, a number of different options that could be used to implement the new information disclosure and arbitration framework, the scope of which can differ quite substantially. These options, which are presented in chapters 3-5, have been developed having regard to the objectives outlined in the preceding sections. The development of the options has also been guided by 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 attempt to imitate the outcomes of a workably competitive market, and involve regulatory costs proportionate to the materiality of issue that the regulation seeks to address.

§ Risk allocation and the accountability for investment decisions should rest with those parties best placed to manage them.

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§ Regulatory frameworks should be flexible and provide firms with a clear and consistent set of rules that allow them to independently develop business strategies and adjust to changes in the market and should also be resilient to change over the long-term.

In developing these options, the GMRG has been cognisant of the costs and risks that may be associated with the new framework and while it is inevitable that its introduction will impose some costs on parties, it should not impose an excessive burden on parties.

The assessment framework that will be used to assess the final design option is based on the rule making test that the AEMC is required to consider when exercising its rule making functions, which states that:29

§ the AEMC may only make a rule if it is satisfied that 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 assessment of the final options will be carried out having regard to:

§ the NGO, which is set out in section 23 of the NGL and states that:

‘The objective of this Law is to 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 Council’s Vision, which provides a high-level policy statement on the direction gas market development should take to meet the NGO (see Box 2.1).

As the AEMC has previously observed, quantifying the costs and benefits associated with the types of reforms that are being contemplated in this paper can be difficult.30 The assessment of the final options will therefore be carried out qualitatively, having regard to the following types of matters.

§ Information disclosure: The final options will be assessed having regard to the costs that pipeline operators are likely to incur under each option and the extent to which the option is expected to:

o reduce the information asymmetries faced by shippers and provide for more informed decisions to be made;

o pose a constraint on the pipeline operator’s exercise of market power; and

o reduce search and transaction costs.

§ Arbitration mechanism and arbitration principles options: The final options will be assessed having regard to the extent to which the option is expected to:

29 Section 291 of the NGL.30 AEMC, Stage 2 Final Report: Information Provision, May 2016, p. 4.

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o encourage parties to reach a commercial agreement and discourage overreliance on the arbitration mechanism;

o provide a credible threat of intervention by an independent arbitrator;

o provide for expeditious resolution of the dispute;

o minimise the costs associated with the arbitration;

o limit the opportunities for gaming by parties;

o provide a simple and clear process for parties to seek arbitration;

o provide the arbitrator with clear principles on the matters to be taken into account when making its decision, including pricing and other principles; and

o preserve investment and innovation in the provision of pipeline services

These factors all have the potential to promote either the efficient use of, investment in, or operation of the pipeline and other natural gas services, which is in the long-term interests of consumers of natural gas.

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3. Information disclosureTransportation and other pipeline services in Australia have historically been sold under highly customised bilateral contracts, with the prices and other terms and conditions struck in these contracts invariably treated as confidential by the parties. The lack of transparency in this market, coupled with the fact that most services are not provided in a workably competitive market, means the price discovery process can involve lengthy bilateral negotiations and be afflicted by information asymmetries that favour the pipeline operator.

During the Examination, concerns were raised by a number of shippers about the information asymmetries they can face in these negotiations and the detrimental effect they can have on their bargaining power and ability to readily identify any attempted exercise of market power.31 Similar concerns were raised in the ACCC’s Inquiry, with the ACCC finding that shippers do not have access to the information they require to negotiate effectively or to determine whether the prices offered are cost reflective.32

To address this imbalance and facilitate more timely and effective negotiations between shippers and the operators of non-scheme pipelines, the Examination recommended that steps be taken to increase the level of disclosure and transparency of:33

§ the full range of services offered by the pipeline;

§ the price and non-price terms and conditions on which services will be offered;

§ the methodologies used by the pipeline operator to determine prices; and

§ the costs incurred by the pipeline operator in providing the services so that shippers can assess the reasonableness of the offer.

To give effect to this recommendation, a new information disclosure head of power will be introduced into the NGL that requires pipeline operators to disclose the information specified in new rules that will be developed through this process.

The remainder of this chapter focuses on the information disclosure and transparency options that could be implemented under this new head of power, which have been developed having regard to:

§ the current level of information disclosure by non-scheme pipeline operators;

§ the information that pipeline operators in other jurisdictions are required to publish, or make available to shippers when a request for access is received;

§ the information that shippers are likely to require when seeking access to the services provided by non-scheme pipelines offering third party access; and


32 ACCC, Inquiry into the east coast gas market, April 2016, pp. 135-136 and 141.33 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14

December 2016, pp. 13-14.

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§ a range of other practical implementation issues, such as the manner, form and frequency with which the information should be disclosed and if any exemptions may be appropriate.

The GMRG’s preliminary view on the information disclosure option that should be implemented is presented in Chapter 6, while Chapter 7 sets out some specific questions in which we are seeking feedback from stakeholders.

3.1 Current level of information disclosure and transparencyUnder the current regulatory framework, scheme pipelines are required by the NGR to publish the following information on their website:

§ Full regulation pipelines are required to publish the AER approved:34

o access arrangement, which sets out the price and non-price terms and conditions on which reference services will be provided (including policies on queuing,35 capacity trading, extension and expansions, and changes to receipt and delivery points); and

o access arrangement information,36 which contains information on the methodology used to calculate prices and the forecast costs (including a return on and of capital) and demand used in the calculation of prices.37

§ Light regulation pipelines are required to publish the prices on offer for services and the other terms and conditions of access applicable to those services.38

Operators of these pipelines are also required to comply with a range of other disclosure provisions in the NGL and NGR,39 including the facilitation of, and request for, access provisions in Part 11 of the NGR, which require pipeline operators to:40

§ comply with any notice the AER issues to provide, at the request of a shipper, information that the shipper reasonably requires to decide whether to seek access to a pipeline service; and

§ respond as soon as practicable to any request by a shipper for the price that will apply to the service it is seeking.

In contrast to full and light regulation pipelines, non-scheme pipeline operators are not subject to any access related information disclosure requirements in the NGR.

34 National Gas Rules, rule 107(1).35 The queuing requirements establish the process for establishing an order of priority between

users of spare or developable capacity in which all users are treated on a fair and equal basis.36 While rule 107 refers to the publication of an access arrangement, rule 44 states that a

reference to the publication of an access arrangement extends to the access arrangement information.

37 National Gas Rules, rules 42 and 72.38 National Gas Rules, rule 36. 39 For example, light regulation pipelines are required by rule 37 of the NGR to report to the

AER on access negotiations. Full and light regulation pipelines are required by an Annual compliance order issued by the AER under the NGL to report on their compliance with a range of safeguards in the NGL and NGR that are designed to prevent the pipeline operator from engaging in activities that could affect access or competition.

40 See National Gas Rules, rules 107 and 108.

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The decision to publish this type of information has instead been left to the operators of these pipelines.

Table 3.2 provides a summary of the access information that non-scheme pipeline operators have elected to publish on their websites.41

41 Note that the table does not necessarily include all non-scheme pipelines.

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Table 3.2: Access related information published by non-scheme pipeline operators

State Pipeline Operator

Information Published on Pipeline Operator’s Website Bulletin Board ReportingPipeline

Information Published PricesStandard Contract Other Access Policies

Cost Information

Transmission

NSW Eastern Gas Pipeline Jemena

Detailed map, length, capacity, available capacity, daily utilisation

Forward haul, backhaul, park and loan, overrun, imbalance and odorisation rates and minimum service charges.Capacity trading bids and offers and executed prices

Non-discriminatory access policy (sets out policies on capacity trading, extensions and expansions, connections and changes to delivery/receipt points, treatment of confidential information and affiliate)

NT

Palm Valley to Alice Springs Pipeline AGN

Darwin City Gate to Berimah Pipeline APA

Bonaparte PipelineEII (APA 19.9%)

Pipeline length Wickham Point Pipeline Daly Waters to McArthur River Pipeline

Power and Water Corporation

Qld

Silver Springs to Wallumbilla Pipeline AGL

Peabody to Mitsui Pipeline Anglo America Berwyndale to Wallumbilla Pipeline APA Stylised map,

pipeline length Indicative firm service charge

South West Queensland Pipeline / QSN Link APA

Stylised map, pipeline length, daily utilisation

Indicative firm service chargeCapacity trading bids and offers and executed prices

Wallumbilla Gladstone Pipeline APA Pipeline length

APLNG LNG Pipeline APLNG

Kincora to Wallumbilla Armour Energy Cheepie to Barcaldine Ergon Comet Ridge to Wallumbilla Pipeline GLNG

Comet Ridge to Wallumbilla Pipeline Loop GLNG

GLNG Pipeline GLNG Pipeline length

Queensland Gas Pipeline Jemena

Detailed map, length, capacity,

available capacity, daily utilisation

Forward haul, backhaul, park and loan, overrun, imbalance

and odorisation rates and minimum service charges.Capacity trading bids and offers and executed prices

Non-discriminatory access policy (sets out policies on capacity trading, extensions and expansions, connections and changes to delivery/receipt points, treatment of confidential information and affiliate)

Dawson Valley Pipeline Meridian/Westside

Spring Gully Pipeline Origin

Darling Downs Pipeline Origin

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State Pipeline Operator

Information Published on Pipeline Operator’s Website Bulletin Board ReportingPipeline

Information Published PricesStandard Contract Other Access Policies

Cost Information

Nth Qld Gas Pipeline Palisade Invest. Pipeline length

Tas Tasmanian Gas Pipeline Palisade Investment Map, historic flows

SA

SESA Pipeline APA Pipeline length

Riverland Pipeline System AGN

SEPS Epic Stylised map, capacity

Moomba to Adelaide Pipeline System Epic Stylised map

SEA Gas PipelineSEA Gas Pty Ltd APA (50%): Rest (50%)

Stylised map, pipeline length, diameter, pipeline utilisation

No primary capacity prices but Capacity trading bids and

offers and executed prices on APA capacity trading site

Non-discriminatory access policy (sets out pricing principles, policies on marketing, capacity trades, queuing, expansions and affiliates)

Vic

Mildura Pipeline AGN Carisbrook to Horsham Pipeline Gas Pipelines Vic Stylised map

South Gippsland Pipeline Multinet (DUET)

WA

Pilbara Energy Pipeline APA Stylised map, pipeline length Indicative firm service charge

Parmelia Gas Pipeline APA Stylised map, pipeline length Indicative firm service charge

Mid-West Pipeline APA (50%): Horizon (50%)

Stylised map, pipeline length Indicative firm service charge

Eastern Goldfields Pipeline APA Stylised map, pipeline length

Tubridgi Pipeline System DUET Wheatstone Ashburton and Ashburton Onslow Pipelines

DUET Pipeline length, diameter

Fortescue River Gas Pipeline

DUET (57%): TransAlta (43%)

Stylised map, length, diameter

Telfer Pipeline EII (APA 19.9%) Beharra Springs Pipeline Origin Karratha to Cape Lambert Pipeline Robe River Iron

Distribution

NSW Wagga Wagga System AGN Tariff V and D charges, monthly metering charge

NT Alice Springs System AGN Vic Mildura System AGN

Tas Tas Gas Distribution System

Brookfield Infrastructure

Connection guidelines, customer initiated works policy, ring fencing policy, use of system agreements

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The table above also identifies those transmission pipelines that are required to provide the Australian Energy Market Operator (AEMO) with information on the capacity and utilisation of the pipeline for publication on either the Natural Gas Services Bulletin Board42 or Western Australian Gas Bulletin Board.

As this table shows, of the 25 non-scheme transmission pipeline operators listed, Jemena and APA Group (APA) are the only ones that are currently publishing their standing offer prices or indicative charges, although in APA’s case indicative charges are only available for a subset of its pipelines. The story is not very different at the distribution level, with only one pipeline currently publishing prices.

In some cases, the lack of disclosure may just reflect the fact that a pipeline is not providing third-party access, or is only servicing a single shipper. However, there are a large number of other pipelines in the table that do not fall into either of these categories. Shippers seeking access to these pipelines must therefore approach the pipeline operator directly to obtain information on the services offered and the price and non-price terms and conditions on which access will be granted.

The other interesting point to note from Table 3.2 is that of the 41 transmission pipelines listed, 18 are required to provide AEMO with the capacity and utilisation information listed in Table 3.3, for publication on the relevant bulletin board.43 While there are some known limitations with the bulletin board information,44 it can still be used by shippers to inform their assessment of a range of access related issues, including:

§ the availability of primary and secondary capacity; and

§ whether the pipeline operator will be able to provide the services they require using the existing capacity, or if an expansion would be required.

42 The bulletin boards are internet-based applications operated by AEMO that contain information on the capacity of transmission pipelines, production and storage facilities, the actual and forecast utilisation of these facilities.

43 For pipelines located in eastern Australia and the Northern Territory, the bulletin board reporting obligations are set out in Chapter 7 of the NGL, Part 18 of the NGR and the Procedures. Under this framework, transmission pipelines and other facilities that meet the minimum reporting threshold (currently 20 TJ/day) and are not subject to an exemption, are required to provide the information prescribed in Part 18 of the NGR to AEMO.

For pipelines located in Western Australia, the reporting obligations are set out in the Gas Services Information Act 2012 (Western Australia) and the Gas Services Information Rules. Like the Natural Gas Services Bulletin Board, producers, storage facility operators and transmission pipeline operators that meet the minimum reporting threshold (10 TJ/day) are required to provide information on capacity, actual and forecast utilisation of facilities.

44 See AEMC, Stage 2 Final Report: Information Provision – East Coast Wholesale Gas Market and Pipeline Frameworks Review, 23 May 2016.

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Table 3.3: Information currently published on bulletin boardsNatural Gas Services

Bulletin BoardWA Gas Bulletin

BoardDetailed facility information*

Pipeline Capacity

Nameplate rating 7-day capacity outlook Medium-term outlook

3-day linepack capacity adequacy flag 12-month uncontracted capacity outlook

Actual pipeline flows (daily) Nominations and forecast flows for next 7 days Shippers with contracted primary capacity Information on secondary trades carried out on pipeline’s secondary capacity trading platform

Listing service for pipeline capacity Source: Natural Gas Services Bulletin Board (http://www.gasbb.com.au/) and Western Australian Gas Bulletin Board (https://gbbwa.aemo.com.au/#home) Notes: * This includes information on all the receipt or delivery points on a pipeline and any transmission pipelines, production and storage facilities to which the receipt or delivery points connect; and all gate stations on that pipeline.

Although not shown in Table 3.3, 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 meeting45 and a rule change request is due to be submitted to the AEMC shortly. If implemented, the rule change will result in:46

§ a greater number of transmission pipelines in eastern Australia being subject to the bulletin board reporting obligations;47

§ pipelines in the Northern Territory being required to comply with the bulletin board reporting obligations once the Northern Gas Pipeline is constructed; and

§ the publication of more detailed information on pipeline flows and information on material intra-day capacity changes, planned asset retirements and expansions.

As part of its East Coast Review, the AEMC also recommended:48

§ 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.

45 COAG Energy Council, Gas Market Reform Package Appendix A – Energy Council response to ACCC and AEMC’s reports, August 2016.

46 AEMC, Stage 2 Final Report: Information Provision – East Coast Wholesale Gas Market and Pipeline Frameworks Review, 23 May 2016.

47 Of the pipelines listed in Table 2.1, the following are expected to become subject to the bulletin board reporting obligations if the rule change is made: the Peabody to Mitsui Pipeline, the Dawson Valley Pipeline, the Cheepie to Barcaldine Pipeline, the Kincora to Wallumbilla Pipeline, the Comet Ridge to Wallumbilla Pipeline Loop, the Silver Springs to Wallumbilla Pipeline, the SEPS and the SESA Pipeline.

48 AEMC, Stage 2 Final Report: East Coast Wholesale Gas Market and Pipeline Frameworks Review, 23 May 2016, p. viii.

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https://gbbwa.aemo.com.au/#home

http://www.gasbb.com.au/

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.

While these reforms are expected to address some of the information asymmetries shippers face, it is clear from the information contained in Table 3.2 and the findings of the Examination, that further reform is required to provide shippers the information they require when:

§ considering whether or not to seek access to a non-scheme pipeline; and

§ assessing the reasonableness of a pipeline operator’s offer.

3.2 Information disclosure in other jurisdictions

Before setting out the reform options that could be implemented, it is worth taking the time to set out the information that pipeline operators are required to disclose in other jurisdictions. A summary of the disclosure regimes that transmission pipeline operators are subject to in New Zealand, Great Britain, the European Union (EU), the United States (US) and Canada is provided in Table 3.4. While there are some significant differences between the gas markets in these jurisdictions and in Australia, the arrangements are nevertheless a useful comparator.

As the information in Table 3.4 highlights, transmission pipelines in these jurisdictions are required to disclose:

§ information on the services offered by the pipeline;

§ the standard price and non-price terms and conditions on which access to each of the services will be offered;

§ the pricing principles and/or methodologies used to calculate prices; and

§ the technical characteristics of the pipeline.

Transmission pipeline operators in New Zealand, Great Britain, the US and Canada are also required, to varying extents, to disclose the following information, which can be used by shippers to assess the reasonableness of prices:

§ detailed information on the costs incurred and the revenue earned from the provision of services and the pipeline operator’s financial performance; and

§ information on the prices paid (or the range of prices paid) by other shippers utilising the pipeline.

When compared with the information pipeline operators are required to disclose in Australia, it is clear that shippers in these other jurisdictions are better equipped to make an informed decision about whether they should seek access and, if so, to assess the reasonableness of the price offered by the pipeline operator.

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Table 3.4: Information disclosure in other jurisdictions New Zealand Great Britain European Union

Information disclosure regime

Transmission pipelines are subject to information disclosure regulation under Part 4 of the Commerce Act 1986. In 2012, the Commerce Commission issued a Gas Transmission Information Disclosure Determination, which sets out disclosure requirements.

The only transmission pipeline in Great Britain, National Grid is required as a condition of its licence to comply with the reporting requirements imposed by Ofgem and those set out in the Uniform Network Code (UNC). In 2015, Ofgem published the Regulatory Instructions and Guidance, which sets out a number of disclosure requirements.

Transmission pipelines in the European Union are required to comply with the disclosure provisions in regulation 715/2009.

Purpose of disclosure regime

The purpose of the regime is to ensure sufficient information is available to interested persons to assess whether the regime is promoting outcomes consistent with those in competitive markets such that suppliers:(a) have incentives to innovate and to invest;(b) have incentives to improve efficiency, provide

services at a quality that reflects demands and share efficiency gains with users, including through lower prices; and

(c) are limited in ability to extract excessive profits.

The purpose of the regime has been described as being to inform shippers of the price and non-price terms and conditions of access and to monitor their performance against the regulatory decision.

The purpose of the regime is defined in Article 18, as being to ensure transparent, objective and non-discriminatory tariffs and to facilitate the efficient utilisation of the pipelines.

Information to be disclosed by transmission pipeline operators

Services offeredThere is no explicit requirement to publish information on the services offered, but it occurs through publication of prices.

National Grid’s services are specified in UNC Pipelines are required to publish information on all of the services offered.

Price and non-price terms and conditions of access

Pipelines are required to disclose the standard prices for services and to publish standard terms and conditions.

National Grid must publish indicative and final prices for specified services and the results of entry and exit capacity auctions must be published. Other terms and conditions of access are set out in UNC.

Pipelines are required to publish the price and non-price terms and conditions of access and other technical information necessary for shippers to gain effective network access.

Pricing principles and/or methodology

Before the start of the year, pipelines are required to publish § the method used to calculate standard prices and the

consistency of the method with the Commerce Commission’s pricing principles; and

§ the approach taken to pricing non-standard contracts

Charging principles and methodologies employed by National Grid must be specified in UNC.

Pipelines (or the relevant national authorities) are required to publish ‘reasonably and sufficiently detailed information on tariff derivation, methodology and structure’.

Costs incurred by pipeline operator and financial performance

On an annual basis, pipelines are required to publish detailed information on: § the costs incurred in prior year (including the value of

assets) and forecast expenditure; § the revenue earned from each service in the prior year

and the volume of services sold, and§ the regulatory profit and return on investment earned.

On an annual basis, National Grid is required to publish detailed information on: § the costs incurred in prior year (including the

value of assets) and forecast expenditure; and§ the revenue earned from each service.It is also required to publish an income statement, cash flow statement and financial position statement.

Pipeline operators are not currently required to publish cost information, but this is currently being considered by the European Commission as part of its assessment of the draft network code for harmonised tariffs.

Demand information

Pipelines are required to publish information on billed quantities, volumes transported, new connections, unaccounted for gas, gas used in compressors, changes in line pack and forecast demand.

National Grid is required to publish information on volumes transported, new connections and volumes stored.

Pipelines are required to publish actual flows, nominations and forecast flows, technical, contracted and available capacity for at least the next 10 years.

Prices paid by other shippers

Pipelines are required to disclose prescribed terms and conditions in the contracts they enter into (including

Entry and exit capacity auction results are published.

Entry and exit capacity auction results are published.

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prices in the standard contracts but not in non-standard contracts).

Other technical and performance information

Pipelines are required to publish information on the technical characteristics of the pipeline, network reliability and integrity metrics, asset management and capacity allocation plans.

National Grid is required to publish information on the technical characteristics of the system, network reliability and integrity, capacity allocation and congestion management methodologies.

The European Commission has approved a network code on capacity allocation and congestion management.

US Canada

Information disclosure regime

Interstate transmission pipelines in the US are subject to the information disclosure requirements established through FERC Orders 637, 710 and Code of Federal Regulations 284. The level of cost and financial reporting disclosure differs in the US, depending on whether the pipeline transports: § more than 50 PJ p.a., in which case it is classified as a major natural

gas company and subject to FERC Financial Report Form. No. 2; and

§ more than 0.2 PJ p.a. but less than 50 PJ p.a., in which case it is classified as a non-major natural gas company and subject to FERC Financial Report Form No. 2A.

Form No. 2A requires less detailed information than Form No. 2.

Interprovincial and international transmission pipelines are subject to disclosure instruments established by the NEB under the National Energy Board Act 1985, with the level of disclosure differing depending on whether the pipeline is classified as a:§ Group 1 pipeline, which is defined as a company that operates large pipeline

systems and has many shippers; or§ Group 2 pipeline, which is defined as a company that operates smaller, less

complex pipelines and has few shippers.To reduce the regulatory burden on smaller companies, the NEB regulates Group 2 pipelines and two Group 1 pipelines on a complaint basis, which means the NEB will only undertake a detailed examination of the prices if a complaint is filed by a shipper or other party. These pipelines are also subject to less onerous reporting obligations.

Objective of regime

The purpose of the regime has been described by FERC as being to: § collect the information it needs to carry out its responsibilities and to

ensure that rates are just and reasonable; § enable shippers and other parties to determine whether prices are just

and reasonable, or if they should lodge a complaint with FERC; and§ demonstrate access is being provided on a non-discriminatory basis.

The purpose of this regime has been described by the NEB as being to enable shippers and other interested parties to determine whether the prices are just and reasonable, or if a complaint should be lodged with the NEB.

Information to be disclosed by transmission pipeline operatorsServices offered Under the regulatory framework that has been adopted in the US,

interstate pipelines can only supply a service and charge users if the price and non-price terms and conditions of access (referred to as the ‘tariff’) have been filed with FERC. The methodology used to calculate the prices and the inputs used in the calculation of prices must be set out in the tariff. This information must be published on the pipeline operator’s bulletin board.

In a similar manner to the US, interstate and international pipelines in Canada can only provide a service and charge users for that service if the price and non-price terms and conditions of access (referred to as the ‘tariff’) have been filed with NEB. The methodology used to calculate the prices and the inputs used in the calculation of prices must be set out in the tariff. Note that Group 2 pipelines are only required to provide shippers and other interested parties with copies of their tariffs and supporting financial information on request.

Price and non-price terms and conditions

Pricing principles and/or methodology

Costs incurred by pipeline operator and financial performance

Major natural gas companies and non-major natural gas companies are required to publish detailed information on a quarterly and annual basis on:§ the costs incurred in the prior period (including the value of the asset

base and accumulated depreciation), and§ the revenue earned from each service and volume of services sold.They are also required to publish a balance sheet, income statement, cashflow statement, accumulated comprehensive income and hedging activities statement and retained earnings statement.As noted above, non-major gas companies are required to publish far less information than major gas companies,

Group 1 pipelines are required to maintain their accounts in accordance with the NEB’s uniform accounting regulations and submit detailed financial surveillance reports on a quarterly basis, which include information on the pipeline’s costs, revenue earned and the actual and approved rate of return. Group 2 pipelines, on the other hand, are only required to maintain their accounts in accordance with generally accepted accounting principles and to file audited annual financial statements with the NEB unless they have been granted an exemption (i.e. because they are not providing third party access). These pipelines can also be required to provide financial information on request by a shipper or the NEB.

Demand information

Pipelines are required to publish information on the volume of gas transported (by service type), peak deliveries and gas supplied by

Group 1 pipelines are required to report on the pipeline’s capacity and daily volumes of gas transported on a quarterly basis, while Group 2 pipelines are not.

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shippers.Prices paid by other shippers

Pipelines are required to publish information on the prices and other terms and conditions struck in all of its firm and interruptible contracts.

If a Group 1 or Group 2 pipelines negotiate prices individually with shippers, the range of rates must be published on their website.

Other technical and performance information

Major natural gas companies are required to publish detailed information on the technical characteristics of the pipeline.

Group 1 pipelines are required to provide a description of the pipeline system and operations in their filings

Sources: NZ: Commerce Commission, Gas Transmission Information Disclosure Determination 2012 – (consolidated in 2015), 24 March 2015; UK: Uniform Network Code, Transportation Principal Document, 11 January 2017 and Ofgem, RIIO-TI Gas Transmission Price Control – Regulatory Instructions and Guidance: Version 2.1, 26 March 2015; EU: Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks, 14 August 2009; US: FERC Order 710, 21 March 2008, FERC, Order No. 637, 9 February 2000, FERC, Financial Report – FERC Form 2 and Supplemental Form 3-Q and Code of Federal Regulations, part 284. Canada: Toll Information Regulations SOR/79-319, NEB, Filing Manual, 16 December 2016.

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The other interesting point to note from Table 3.4 is that in Canada, the National Energy Board (NEB) has sought to reduce the regulatory burden on smaller interstate transmission pipelines with less extensive systems (Group 2 pipelines) by applying a less onerous disclosure regime to these pipelines. These pipelines are, for example, only required to disclose cost information if an access request is received and while they are required to file audited financial statements with the NEB they are not subject to the detailed accounting regulations that their counterparts (Group 1 pipelines) are. A Group 2 pipeline that is not providing third party access may also seek an exemption from filing financial statements.

The Federal Energy Regulatory Commission (FERC) has adopted a similar approach in the US for cost and financial reporting, with interstate pipelines that transport less than 0.2 PJ p.a. being exempt from reporting. Pipelines transporting more than 0.2 PJ p.a. but less than 50 PJ p.a. are also subject to less onerous reporting obligations than pipelines that transport more than 50 PJ p.a.49

While transmission pipelines in each of these jurisdictions are subject to regulatory oversight, shippers are still quite reliant on the disclosure regimes. For example:

§ In New Zealand, the Commerce Commission approves the revenue that the pipeline operator can earn but not the price and non-price terms and conditions that will apply to each service. Shippers seeking access to a pipeline service in New Zealand must therefore negotiate with the pipeline operator. The information disclosure regime therefore reduces the information asymmetry that shippers would otherwise face in these negotiations.

§ In Canada and the US, greater emphasis has been placed on negotiated settlements between the pipeline operator and shippers and complaint based regulation (i.e. a shipper lodges a complaint with the NEB or FERC if it thinks a rate is unjust or unreasonable), than formal rate hearings by the regulator. The information disclosure regimes adopted in these jurisdictions therefore reduce the information asymmetry that shippers would otherwise face when negotiating or assessing the reasonableness of prices.

3.3 Information required by shippers

Turning now to the information that shippers are likely to require when seeking access to a non-scheme pipeline that is operating on a third-party access basis and the information that the operators of these pipelines should be required to disclose. In the Examination, it was noted that the information asymmetries faced by shippers could be reduced by increasing the level of disclosure and transparency of the information shippers require when: 50

49 See FERC Financial Report: Form No. 2A: Annual Report of Non-Major Natural Gas Companies and Supplemental Form 3-Q: Quarterly Financial Report and FERC Financial Report: Form No. 2: Annual Report of Major Natural Gas Companies and Supplemental Form 3-Q: Quarterly Financial Report.


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§ considering whether to seek access to a pipeline, which the Examination noted could include information on:

o the services offered by non-scheme pipelines;

o the price and non-price terms and conditions on which services will be offered; and

o the methodologies used by the pipeline operator to determine prices; and

§ assessing the reasonableness of a pipeline operator’s offer, which the Examination noted could include information on the pipeline operator’s costs.

Through the discussions that have been held with stakeholders following the release of the Examination, it has become clear that shippers and pipeline operators alike support disclosure of information to assist shippers when considering whether to seek access to a pipeline. Mixed views have, however, been expressed by stakeholders about the need to disclose information on the costs incurred by the pipeline operator and other information that could inform a shipper’s assessment of the reasonableness of the offer, such as the prices payable by other shippers.

These issues are examined in further detail below.

3.3.1 Information required when considering whether to seek accessBased on the feedback received to date and the information set out in sections 3.1 and 3.2, it would appear that, when considering whether to seek access to a non-scheme pipeline providing third-party access, the base level information required by shippers is:(a) Information on the range of services offered by the pipeline.(b) Information on the availability of the services offered by the pipeline. (c) The standing offers for the services that can be provided using the existing

capacity of the pipeline, which includes information on:(i) the price and non-price terms and conditions on which the pipeline operator

will offer to provide the services; (ii) the methodology used by the pipeline operator to calculate the price of each

of the services listed in (a); and(iii) any other policies the pipeline operator employs that may affect a shipper’s

access to, or use of, the pipeline.

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. Because 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. Further negotiation is also likely to be required if the pipeline must be extended, expanded, interconnected or otherwise modified to meet the shipper’s requirements.

(d) 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.

(e) The negotiation framework that will apply if the shipper is to request access, which amongst other things, should set out the process a shipper is to follow if it wants to request access, indicative timeframes for the negotiations and the ability of the parties to have recourse to the commercial arbitration framework.

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Further detail on the type of information pipeline operators could be expected to disclose under each of these categories is provided in Table 3.5.

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Table 3.5: Base level of information required by shippersInformation category Information to be disclosed

(a)Range of services offered by pipeline

To enable shippers to make an informed decision about whether they should seek access to a pipeline and to a particular service provided by the pipeline, they will require a description of all the services offered by the pipeline operator, which could include: § transportation services (e.g. firm, as available, interruptible forward haul, bi-directional, backhaul, spot and seasonal services); § park and/or loan services (e.g. firm, as available, interruptible); § pipeline interconnection services; and/or § other ancillary services (e.g. redirection services, compression services, capacity trading services and in-pipe trading services).Where relevant, the description should also explain: § what priority the service will have in terms of scheduling and curtailment; and§ any other factors that may affect access or use of the service (e.g. if a service is only available between certain locations).

(b)Availability of services

If shippers are considering seeking access to a service, they will need to know whether the services are likely to be available over the period they require, or if there are some restrictions on its availability. While in some cases, this may require the pipeline operator to investigate the request, there are some basic metrics that could be reported on transmission pipelines that could inform a shipper’s consideration, such as: § an estimate of the current volume of capacity that had been contracted;§ a medium-term outlook for uncontracted capacity; and§ historic peak and daily gas flows by receipt and delivery point, potentially broken down by service type (e.g. firm, as available,

interruptible, backhaul) so that shippers can assess the reliability of non-firm services.While a number of pipelines are already required to disclose some of this information for publication on a bulletin board, not all pipelines are subject to this disclosure requirement. Additional reporting obligations may therefore be required.

(c) Standing offer for services that can be provided by existing capacity

Price and non-price conditions

Before approaching a pipeline operator, shippers should be able to review the standing price and non-price terms and conditions on which a pipeline operator would offer to provide the services, so that they can assess the financial and commercial feasibility of seeking access.

Pricing methodology

To assess the reasonableness of the standing prices, shippers will need to understand the methodology that has been used to calculate the prices. Amongst other things, the methodology should: § specify whether prices have been calculated with reference to a cost of service or by applying a market based approach and describe

the methodology that has been employed and any economic principles that have been considered; § where relevant, describe the relationship between the standing firm transportation charge and other services (e.g. backhaul, as

available and interruptible services), and why a particular multiplier that has been applied to those services; and§ state the extent to which the methodology is consistent with the pricing principles that would be employed if the arbitration mechanism

was triggered

Other policies

In addition to requiring information on the non-price terms and conditions of access, shippers also need to be aware of any policies that pipeline operators may have that could affect their access to a service, such as policies on queuing,51 capacity trading,52 receipt and

51 A queuing policy sets out how the order of priority for spare and developable capacity will be determined. 52 A capacity trading policy sets out the circumstances in which the pipeline operator’s consent is required if a shipper is considering entering into a

secondary capacity trade.

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Information category Information to be discloseddelivery point changes,53 measurement, allocations and the process for expanding, extending or otherwise modifying the pipeline.

(f) Technical characteristics of the pipeline that may affect access

When seeking access to a pipeline and evaluating the terms and conditions on which it will be offered, shippers should be able to readily access:§ a map of the pipeline system, which shows the location of receipt and delivery points, compressor stations, city gates and other key

facilities; and§ a description of the pipeline system’s capabilities, including the nameplate capacity, delivery pressures and any other characteristics

that may affect a shipper’s access to a service, or the price payable (for example, if a pipeline is only bi-directional between certain points).

While a number of pipelines are already required to disclose some of this information for publication on a bulletin board, not all pipelines are currently subject to this disclosure requirement. Additional reporting obligations may therefore be required in those cases.

(g)Negotiation framework

Before making an application to access the services provided by a particular pipeline, shippers will need to be aware of, amongst other things:§ the process the shipper is to follow when making the application, the information it must provide in its application and how any

confidential information will be treated;§ the obligation both parties have to negotiate in good faith;§ the shipper’s right to trigger the arbitration mechanism in the NGL and NGR if negotiations fail;§ the indicative timeframes for key stages of the negotiations, which could differ depending on whether the shipper is seeking access to:o services that can be provided using the existing capacity of the pipeline; oro services that require the pipeline to be augmented, which could occur if a shipper’s request requires the pipeline to be extended,

expanded, converted into a bi-directional pipeline, connected with another pipeline, or otherwise modified (for example, to add a new receipt or delivery point).

In the latter case, a pipeline operator is likely to require additional time to investigate the commercial and technical feasibility of the augmentation. The indicative timeframes should provide an indication of the timeframe within which:

§ the pipeline operator is expected to respond to the shipper to advise them whether or not:

o the service can be provided and, if so, the price and non-price terms and conditions on which it offers to do so; oro further investigation is required to determine whether the service can be provided and the process that is to be followed to

investigate the proposal (including how the costs of carrying out such investigations are to be recovered).

§ the shipper is expected to respond to an offer; and

§ when the negotiations will be finalised; and

This information is expected to be reflected in a negotiation framework that the pipeline operator would be responsible for developing and maintaining, subject to some minimum requirements specified in the NGR.

53 A change of receipt or delivery points policy sets out the conditions under which the pipeline operator will or will not consent to changes and any conditions to be complied.

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In the feedback received in response to the draft Amendment Bill, there seemed to be 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. This is consistent with the recommendation in the Examination that greater transparency in this area would enable shippers to make more informed decisions about whether to seek access to a particular pipeline and facilitate more timely and effective negotiations. Greater transparency in this area, would also allow shippers to compare standing offers across pipelines, which may strengthen their position in the negotiations.

3.3.2 Information shippers may require to assess the reasonableness of an offer

Once a shipper has received an offer from the pipeline operator, it will need to assess the reasonableness of that offer. Some examples of the type of information that could help to inform a shipper’s assessment and facilitate a more timely and effective negotiation, include:(a) Costs and other financial information, which could include:

(i) information on the costs incurred (or expected to be incurred) by the pipeline operator in providing the service and the demand for services; and/or

(ii) the pipeline’s financial reports (i.e. balance sheet, income statement, cash flow statement and notes to the reports).

(b) Price related information, which could include information on:

(i) the prices offered by other pipelines (including pipelines that are subject to full or light regulation) for a comparable service;

(ii) the prices actually paid by other shippers on the same pipeline (or on other pipelines), for a comparable service; and/or

(iii) the prices payable for other services that may compete with the service provided by the pipeline operator.54

(c) Information on the non-price terms and conditions offered on other pipelines (including pipelines that are subject to full or light regulation).

If the information set out in the preceding section is disclosed, then the price and non-price terms and conditions offered by other pipelines ((b)(i) and (c)) will already be available to shippers. Of the remaining information categories listed above, the only ones that a non-scheme pipeline operator would be in a position to disclose are the:

§ the pipeline’s costs and other financial information ((a)); and

§ the prices actually paid by other shippers on the pipeline ((b)(ii)).

54 For example: • the prices struck in secondary capacity trades may inform pricing of as available or interruptible services;

and

• the prices payable to other storage providers may, depending on their location, inform the prices payable for park and loan services.

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In contrast to the information requirements described in the preceding section, there are a number of issues that need to be considered before a decision can be made about whether this type of information should be disclosed and, if so, the form it should take. These issues are discussed in further detail below.

3.3.2.1 Costs and other financial information

As outlined in the introduction to this section, mixed views have been expressed in the consultations carried out to date about the relevance of the costs incurred by the pipeline operator in providing services and other financial information. The key issues that have been raised in this context, relate to:

§ the rationale for disclosing this type of information; and

§ the form the information disclosure would take and, in particular, how detailed the information would need to be.

Rationale for disclosing costs and other financial information

During the Examination, smaller shippers indicated that the absence of publicly available information on the costs incurred by pipeline operators made it difficult to assess the reasonableness of an operator’s offer.55 The Examination therefore recommended the disclosure of information on the costs incurred by pipeline operators in providing services.56

In the consultation that has occurred since the report was released, pipeline operators have questioned whether the disclosure of this information is necessary. Shippers, on the other hand, have claimed that the publication of this information is necessary to enable them to determine whether prices are cost reflective, or provide for excessive returns, although shippers noted that access to this information was less important if a pipeline or service is subject to some form of competition.

In the ACCC’s Inquiry, the ACCC noted that the lack of publicly available information on the costs incurred by pipeline operators and the relationship between these costs and the prices charged for services, can limit a shipper’s ability to identify monopoly pricing and to negotiate effectively.57 The ACCC therefore recommended that the information disclosure provisions in the NGL be expanded to:58

‘…require all pipelines operating on an open access basis (that is, regulated and unregulated pipelines) to publish financial information that shippers can use to determine whether or not the prices they are offered by pipeline operators are cost reflective. The publication of this information would enable shippers to negotiate more effectively with pipeline operators and to identify any exercise of market power more readily’.

The ACCC did not draw a distinction in this recommendation between pipelines that are subject to competition and those that are not, because it found that competition


56 Ibid, p. 14.57 ACCC, Inquiry into the east coast gas market, April 2016, pp. 135-136.58 Ibid, p. 12

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from other pipelines and services may not be as effective in constraining the behaviour of pipeline operators as might be expected.59

The views expressed by the ACCC about access to cost information are broadly consistent with those expressed in the second reading speech for the NGL, which noted that:60

‘…customers can only negotiate with service providers when they have adequate information to determine whether or not payments required of them accurately reflect the efficient cost of providing the service. In a competitive market, the efficient cost is revealed as competing providers seek to outbid each other down to the point where they are covering their costs plus a normal profit. Where a business is a natural monopoly this does not occur and it can be difficult for consumers and regulators to access information from natural monopoly service providers.’

As this extract highlights, if the services in question were subject to effective competition, then shippers could rely on the competitive process to drive prices down to an efficient level. However, most of the services provided by pipelines are not subject to any form of competition. Shippers must therefore undertake their own assessment of whether the prices offered by the pipeline operator for the provision of these services reasonably reflect the costs incurred in the provision of services.

The emphasis placed on cost information by the ACCC and by the architects of the NGL and NGR is consistent with the approach used in New Zealand, Great Britain, Canada and the US (see Table 3.4). It is also consistent with the Competition Principles Agreement61 and a number of lighter handed access regimes in Australia, including:

§ the AustralAsia Railway (Third party Access) Act 1999 (South Australia) – this regime establishes a right for above-rail operators to negotiate access to the below rail services, the service provider is required to provide access seekers with information about the costs associated with the service.62 The service provider is also required to prepare the information in accordance with guidelines developed by the Essential Services Commission of South Australia (ESCOSA).63

59 ACCC, Inquiry into the east coast gas market, April 2016, p. 98.60 South Australian Hansard 2008, National Gas (South Australia) Bill 2008, Legislative

Assembly, 9 April 2008, p. 2890 61 For example, the Access to Services Provided by Means of Significant Infrastructure

Facilities provisions in the Competition Principles Agreement state that separate accounting arrangements should be required for elements of a business covered by an access regime and that the dispute resolution body, or relevant authority, should have access to financial statements and other accounting information pertaining to a service. Competition Principles Agreement, cl. 6(4)(n)-(o).

62 AustralAsia Railway (Third party Access) Act 1999 (South Australia), section 9.63 These guidelines require the service provider to provide information on:

• operating costs, including maintenance costs (including major periodic maintenance), labour and materials associated with the operation of the required railway infrastructure and administrative costs; and

• capital-related costs, including both depreciation and a return on assets.They also require the cost information to distinguish between costs attributable to passenger and freight services, and freight services that may involve sustainable competitive prices and those which do not.

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§ the negotiated service64 framework in the National Electricity Rules (NER) – this framework requires service providers to inform access seekers of the costs of providing the service and to demonstrate that the charges reflect the cost.65

Having regard to what has occurred in these other regimes and the recommendation from the Examination that the reforms should seek to limit the opportunity for pipelines to earn excessive returns,66 the GMRG is of the view that disclosure of some form of cost or financial information is required. Apart from reducing the information asymmetries faced by shippers in negotiations, greater transparency in this area should impose more discipline on all pipeline operators when determining the price of services and discourage exercises of market power.

Form that the information disclosure could take

The GMRG is aware that the disclosure of cost and other financial information is not without cost. Careful consideration would therefore need to be given to the information that is required and the level of detail that should be provided.

In the discussions held to date, shippers have expressed mixed views about the level of information required. Some shippers, for example, thought that the information contained in financial reports, coupled with information on the demand for services, would be sufficient. Other shippers, on the other hand, claimed they require access to more detailed and disaggregated cost, demand and financial information so that they can carry out a detailed bottom-up analysis of the cost of service. This group of shippers also suggested that pipeline operators should be required to publish financial reports for each pipeline.

The distinction that this group of shippers drew between the information that would be contained in financial reports and what would be provided in more detailed and disaggregated cost information, is that in the latter case:

§ additional information would be provided on the adjustments that need to be made to the values in the financial reports to make them more relevant to pricing (for example, by removing or disclosing movements in provisions and disclosing where transactions involve related parties);

§ the information would be sufficiently disaggregated to allow shippers to conduct their own review of the efficiency of the pipeline’s past costs, which, depending on the technique applied, requires expenditure to be broken down into categories of expenditure (i.e. input type) and into activities/functions (for

ESCOSA, Rail Industry (Tarcoola-Darwin) Guideline No. 3, Regulatory Information Requirements, June 2004.

64 Under chapter 6 of the NER, the AER may classify services as direct control or negotiated services. The difference between these services is that if a service is classified as a direct control service, then the price and non-price terms and conditions of access to direct control services are subject to ex ante regulation by the AER. Negotiated services, on the other hand, are not subject to ex ante regulation. The price and non-price terms and conditions of access to these services are instead determined through commercial negotiation, with a back stop of dispute resolution if negotiations fail. The dispute resolution body in this case is the AER.

65 See rule 6.7.5 of the NER.66 Vertigan, M., Examination of the current test for the regulation of gas pipelines, 14

December 2016, p. 92.

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example, replacement versus augmentation capital expenditure), and to provide separate information about material augmentation projects.

The detailed and disaggregated cost information described above is broadly consistent with the information that the AER collects from some regulated pipeline operators through regulatory information notices. It is also consistent with the approach used by regulators in New Zealand, Great Britain, Canada and the US, who require regulated transmission pipelines to disclose quite detailed and disaggregated cost and financial information (note though that in Canada and the US a lower level of disclosure is required of smaller pipelines - see Table 3.4). In New Zealand and Great Britain, pipeline operators are also required to provide an indication of forecast expenditure and demand.

Given the feedback received to date and the approaches employed in other jurisdictions, it would appear that there are two cost related disclosure options that could be employed:

1. Disclosure of the pipeline’s verified financial reports and demand data – Under this option, pipeline operators would be required to maintain separate accounts for each pipeline and publish financial reports and demand information (broken down by service) for the prior year. While this information could not be used to carry out a detailed bottom-up cost of service analysis, it would still 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 an offer.

2. Disclosure of detailed and disaggregated cost and other financial information that is more directed toward pricing than financial reports – Under this option, the pipeline operator could be required to:

o Publish detailed and disaggregated historic information on:

– the revenue earned from the provision of services;

– the actual demand for services; and

– the costs incurred by the pipeline operator (which will include information on the value of the pipeline, how the value has been rolled forward, capital and operating expenditure, the cost of capital, depreciation, tax and cost allocation methodologies).

The pipeline operator could also be required to publish additional information on the adjustments that need to be made to the values in the financial reports to make them more relevant to pricing.

If the pipeline operator expects the demand for its services and/or costs to change materially going forward, then it could also be required to provide an indication of the nature of the changes.

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The reporting templates used in New Zealand,67 the US68 or by the AER in the context of regulatory information notices, could provide a guide as to how much detail would need to be published under this option.

o Provide a shipper seeking access to a service that requires the pipeline to be augmented in some way, a breakdown of the cost estimates used in the calculation of its offer.

If the information is sufficiently disaggregated, shippers would be able to carry out their own bottom-up analysis to assess the reasonableness of the offer.

Importantly, under both options, pipeline operators would need to maintain separate accounts for each pipeline.69 It is not clear to the GMRG if this form of accounting separation represents a significant burden, for example, if it would require a change in corporate structure in some instances. The GMRG is therefore interested in hearing stakeholders’ views on this issue.

3.3.2.2 Prices paid by other shippers

In a similar manner to the cost and financial information, stakeholders have expressed mixed views about requiring the publication of the prices paid by other shippers, with most of the debate focusing on:

§ the rationale for disclosing this type of information; and

§ the form the information disclosure would take.

Rationale for disclosing the prices paid by other shippers

The Examination, did not contain any recommendations about the disclosure of information on the prices payable by other shippers. It has, however, been suggested in subsequent discussions with some stakeholders that there would be value in requiring the disclosure of this information in an aggregated form, so that shippers can compare their offers with the prices payable by others. Other stakeholders, however, questioned the value of this information and noted it would provide them with no real insight into whether the prices are cost reflective. This group also noted that the price paid by other shippers is irrelevant to most shippers because in most cases they do not compete with each other in end-markets.

The Australian Pipelines and Gas Association (APGA) also questioned the value of reporting this information in its submission to the Examination and noted that its publication could drive homogeneity in the pricing of services across pipelines and stifle innovation. APGA argued that this would restrict the pipeline operator’s ability to discriminate on price or service offering and, in so doing, limit the potential for

67 See New Zealand Commerce Commission, ‘Gas information disclosure’, http://www.comcom.govt.nz/regulated-industries/gas-pipelines/gas-information-disclosure/ (Accessed 14 March 2017).

68 See FERC, Financial Report – FERC Form 2 and Supplemental Form 3-Q.69 This is consistent with what is required of scheme pipelines, with section 141 of the NGL

requiring the operators of these pipelines to prepare, maintain and keep separate accounts in respect of the services provided by means of every covered pipeline owned, operated or controlled by the operator and a consolidated set of accounts.

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http://www.comcom.govt.nz/regulated-industries/gas-pipelines/gas-information-disclosure/

economically efficient outcomes, such as making allowances to assist a marginal project go ahead.

The GMRG is aware that the disclosure of this type of information was considered by the AEMC in its East Coast Review and in its Stage 2 Draft Report, it recommended that the prices struck in primary contracts should be published. In doing so, the AEMC noted that:70

‘To the extent that pipeline owners are currently price discriminating, transparent historical prices, terms and conditions should place a discipline on pipeline owners not to undertake this practice. Even if price discrimination is not occurring in practice, transparency should give shippers confidence that this is indeed the case, and improve their negotiating power with the pipeline owners.’

Although a small number of stakeholders supported this recommendation, a larger number expressed concerns about the proposed publication of this information. 71 In most cases, the concerns centered on confidentiality. A number of stakeholders did, however, note that the benefits of publishing this information would be limited because of the bespoke nature of the underlying contracts.72

In its Stage 2 Final Report, the AEMC noted the ACCC’s recommendation that the disclosure of information by pipeline operators be subject to a more detailed review and suggested that the publication of prices be considered further in this review.73 The review of the information disclosure requirements suggested by the ACCC is being considered as a component of this consultation process. It is relevant therefore to consider whether there would be any value in requiring the disclosure of the prices payable by shippers.

As noted in Table 3.4, the disclosure of the prices paid by shippers is required in a number of other jurisdictions, including the US and Canada. The GMRG understands, however, that the majority of shippers in these countries are paying the standing price for their services and are subject to relatively standardised terms and conditions.

This is quite different from the situation in Australia, where most transportation contracts are highly customised and the prices struck in these contracts can reflect the value of a range of different terms and conditions.74 For example, if a contract provided a shipper with significant maximum hourly flexibility then the price could be expected to be higher than what a shipper seeking less flexibility would pay. Thus, if

70 AEMC, Final Report: East Coast Wholesale Gas Markets and Pipeline Frameworks Review, May 2016, p. 110.

71 AEMC, Submissions – East Coast Wholesale Gas Market and Pipeline Frameworks Review, May 2016, p. 55.

72 Ibid.73 AEMC, Final Report: East Coast Wholesale Gas Markets and Pipeline Frameworks Review,

May 2016, p. 112.74 Some of the terms and conditions in a contract that can affect the price include: the firmness

of the service; the duration of the contract; the distance the gas is to be transported if prices are not postage stamp based; the amount of flexibility a shipper has to deal with imbalances and overruns; the maximum hourly flexibility; the price structure; the price escalation mechanism; and other provisions that provide the shipper with flexibility or options (for example, an option to extend the contract on the same term or to take extra capacity).

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prices were to be disclosed, as the AEMC noted in its Stage 2 Draft Report, information on all the terms and conditions that can affect the price would also need to be published. There may also be a need to publish information on any specific circumstances that affected the price (for example, if the pipeline had to be expanded, or if the shipper has been provided a prudent discount).

If this information was not released, or if prices were just aggregated without taking these factors into account, then it could be quite misleading for shippers that are trying to assess the reasonableness of an offer. That is not to say that there may not be value in requiring the disclosure of prices. It is just that other information would also need to be released so that shippers can determine whether the price payable by another shipper is for a comparable service.

Another issue that shippers would need to bear in mind if this information was published is that even if the prices struck in the other contracts were cost reflective when they were entered into, that may not be the case when a new contract is entered into. For example, if the volume of gas transported on a pipeline was to increase significantly but this had little effect on the pipeline operator’s costs, then if the price was maintained at the level struck in the older contracts, the price would no longer be cost reflective and the pipeline operator may earn excessive returns. Conversely, if the volume of gas was to fall substantially and it had little effect on costs, then if the price struck in the older contracts was applied, the pipeline operator may be unable to recover its costs.75

Shippers would therefore need to carefully consider whether the prices payable in these contracts are a good indicator of the price they should expect to pay.

Form that the information disclosure could take

Setting aside the issues raised in the preceding section, if a decision is made to publish the actual prices payable under existing contracts, then consideration will need to be given to whether the pipeline operator should be required to disclose:

§ all the prices struck in contracts and details of any terms and conditions that may have affected the prices struck in those contracts; and

§ the range of prices struck in contracts for comparable services and other metrics, such as the weighted average and median price for the relevant service.

As outlined above, shippers have raised some confidentiality concerns about the first option and suggested the latter option would be preferable if prices were to be published. It is worth noting though, that if there are only one or two shippers utilising a service, then this option could still raise confidentiality concern. The other problem with this option is that it could mislead shippers if there are significant differences between the terms and conditions in the underlying contracts that affect price and this is not taken into account in the aggregation. 75 Similarly, if the costs incurred by a pipeline operator were to decrease significantly but there

was little change in the volume of gas transported, then if the price was maintained at the level struck in the older contracts, the price would no longer be cost reflective and would enable the pipeline operator to earn excessive returns. Conversely, if costs were to increase substantially and there was little change in gas transported, then if the price struck in the older contracts was applied the pipeline operator may not be able to recover its costs.

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Given these issues, further consultation on the disclosure options would be required before a decision could be made on the form the information disclosure should take.

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3.4 Information disclosure options

Drawing on the material set out above, the GMRG has 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, but no additional information to inform their assessment of the reasonableness of prices.

§ Option 2: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline and verified financial reports and demand information that shippers can use to assess the reasonableness of the price offered (“Option 1 and financial reporting”).

§ Option 3: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline, financial reports and detailed cost, demand and financial information that shippers can use to assess the reasonableness of the price offered (“Option 2 and detailed cost information”).

§ Option 4: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline, financial reports and information on the prices actually paid by shippers on the pipeline (“Option 2 and price reporting”).

§ Option 5: Disclosure of a base level of information that shippers require when considering whether to seek access to a pipeline, financial reports, detailed cost, demand and financial information, and price reporting (“Option 3 and price reporting”).

These options can be viewed as being on a spectrum, with Option 1 providing for the disclosure of a base level of information required by shippers, while Option 5 provides for the disclosure of the maximum amount of information. Common to each of these options is the requirement that pipeline operators disclose the base level of information that shippers require when considering whether or not to seek access to a service (see section 3.3.1). The main difference between the options is therefore whether pipeline operators are also required to publish financial reports, detailed cost, demand and financial information and/or the prices paid by shippers under existing contracts.

3.4.1 Option 1: Disclosure of base level of information shippers require when considering whether to seek access to a pipeline

Under this option, non-scheme pipeline operators would be required to disclose the base level of information set out in section 3.3.1 on their website, which includes:(a) Information on the range of services offered by the pipeline.(b) Information on the availability of the services offered by the pipeline. (c) The standing offers for the services that can be provided using the existing

capacity of the pipeline, which includes information on:

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(i) the price and non-price terms and conditions on which the pipeline operator will offer to provide the services;

(ii) the methodology used by the pipeline operator to calculate the price of each of the services listed in (a); and

(iii) any other policies the pipeline operator employs that may affect a shipper’s access to, or use of, the pipeline.

(d) 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.

(e) The negotiation framework that will apply if the shipper is to request access, which amongst other things, should set out the process a shipper is to follow if it wants to request access, indicative timeframes for the negotiations and the ability of the parties to have recourse to the commercial arbitration framework.

To the extent that any of this information was already available on a bulletin board, then a link from the pipeline operator’s website to the relevant bulletin board would be sufficient.

Apart from this information, pipeline operators would not be required to publish any specific information to assist shippers with their assessment of the reasonableness of the offer.

From a pipeline operator’s perspective, this is the least onerous option and would give rise to the lowest reporting costs. From a shipper’s perspective, however, this option may do little to reduce the imbalance it faces in negotiations because there may still be a significant amount of information asymmetry surrounding the reasonableness of the price offered by the pipeline operator. The information disclosed under this option may not therefore be sufficient to avoid a dispute, or to impose some discipline on pipeline operators when setting prices.

3.4.2 Option 2: Option 1 and financial reporting

Under this option, non-scheme pipeline operators would be required to disclose the information outlined under Option 1 on their website and in addition publish verified financial information and a breakdown of demand (by service) on their website on an annual basis, four months76 after the end of the financial year. The verified financial reports would need to be prepared in accordance with the relevant Australian Accounting Standards and include:

§ 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

76 This timing is consistent with the requirements for ASIC’s Form 388 (Copy of financial statements and reports) filings.

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§ notes to the financial reports, which, amongst other things, should include information on the methodologies or principles the pipeline operator has used to determine the value of the assets, the depreciation allowance and cost allocation.

To ensure the financial reports are presented at a sufficiently disaggregated level to be useful to shippers, and to ensure consistency in reporting, there may be value in developing a guideline that specifies:

§ what information is to be reported and in what format; and

§ any reporting principles to be employed.

The guideline would not require pipeline operators to use specified methodologies, for example in relation to appropriate asset valuation, rate of return or cost allocation. Rather, the guideline would require the pipeline operator to identify the methodology used to determine the asset valuation, rate of return and cost allocation reflected in the financial reports. The guideline would likely be developed by the AER.

From a pipeline operator’s perspective, this option would give rise to additional reporting costs because it would have to prepare, maintain and publish separate accounts for each pipeline and have the financial reports independently verified. The costs are not, however, expected to be as high as under options 3-5.

From a shipper’s perspective, this option would provide high-level cost information that could be used to carry out a high-level assessment of whether the prices are cost reflective and the rate of return generated by the pipeline. The publication of this information should therefore go some way to reducing the information asymmetries faced by shippers and minimising the risk of a dispute. 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.

3.4.3 Option 3: Option 2 and detailed cost information

Under this option, non-scheme pipeline operators would be required to disclose the information outlined under Option 2 on their website and publish more detailed cost, demand and other financial information on an annual basis four months after the end of the financial year. The information would need to be independently verified and include information on:

§ the revenue earned from the provision of services (broken down by service type);

§ the actual demand for each service;

§ the opening and closing value of the asset base in the last financial year (including information on asset disposals) and a description of the method or principles used to determine the value of the asset base;

§ capital expenditure in the last financial year;

§ operating expenditure in the last financial year;

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§ the extent to which depreciation has been recovered through prices in the last financial year and information on the remaining economic lives of the assets;

§ the tax paid in the last financial year;

§ the cost allocation methodology employed in the last financial year (including a description of how overheads are allocated); and

§ any related party transactions entered into in the last financial year.

If the pipeline operator expects expenditure and/or the demand for its services to change substantially in the coming year and for this to flow through to prices, then it should also publish a statement indicating the nature of those changes.

Under this option, a shipper seeking access to a service that requires an extension, expansion, interconnection or some other form of investment in the pipeline, would also be able to request a breakdown of the costs used in the calculation of the pipeline operator’s offer.

In a similar manner to Option 2, there could be value in requiring the AER to develop a guideline that specifies exactly what type of information is to be reported and any principles to be employed.

The choice between this option and Option 2 is closely linked to the pricing principles that are to be employed in the arbitration. That is, if a decision is made that the pricing principles should require the arbitrator to apply a cost of service methodology, then Option 3 would be more appropriate than Option 2.

From a pipeline operator’s perspective, this option could give rise to significant reporting costs because it would have to prepare, maintain and publish the detailed cost and financial information and have the information independently verified.

From a shipper’s perspective, this option would allow it to carry out a more detailed bottom-up assessment of whether prices are cost reflective and examine the rate of return generated by the pipeline operator. The publication of this information should therefore substantially reduce the information asymmetries faced by shippers and minimise the risk of a dispute. In a similar manner to Option 2, even if a shipper does not use the information in this way, its publication can be expected to impose greater discipline on pipeline operators when setting prices.

3.4.4 Option 4: Option 2 and price reporting

Under this option, non-scheme pipeline operators would be required to disclose the information outlined under Option 2 on their website and would also be required to publish information on the prices actually paid by shippers on its pipelines, with the price reporting options including:

§ publishing all of the prices struck in contracts and details of any terms and conditions that may have affected the prices struck in those contracts; or

§ publishing the range of prices struck in contracts for comparable services and the weighted average and median price for these services.

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This information would be expected to be updated shortly after a new agreement has been entered into, or when an existing agreement ends.

As noted in section 3.3.2.2, there are advantages and disadvantages associated with both of these options, so further consultation would be required before a decision could be made on which of these options should be adopted.

Irrespective of the form the price reporting takes, this option would, from a pipeline operator’s perspective, give rise to some incremental reporting costs relative to Option 2, because it would have to prepare, maintain and publish information on the prices actually paid by its shippers.

From a shipper’s perspective, if the confidentiality and aggregation issues outlined in section 3.3.2.2 can be overcome, this option would allow it to:

§ carry out a high-level assessment of whether the prices are cost reflective and the rate of return generated by the pipeline; and

§ compare its offer with the prices paid by other shippers for comparable services.

If these limitations cannot be overcome, then the publication of this information is unlikely to provide any additional value to shippers.

3.4.5 Option 5: Option 3 and price reporting

Under this option, non-scheme pipeline operators would be required to disclose the information outlined under Option 3 on their website and would also be required to publish information on the prices actually paid by shippers on its pipelines, with the price reporting options including:

§ publishing all of the prices struck in contracts and details of any terms and conditions that may have affected the prices struck in those contracts; or

§ publishing the range of prices struck in contracts for comparable services and the weighted average and median price for these services.

From a pipeline operator’s perspective, this is the most onerous disclosure option and would give rise to the highest reporting costs.

From a shipper’s perspective, this option could substantially reduce the information asymmetries shippers can face because it would allow the shipper to:

§ carry out detailed bottom-up assessment of whether the prices are cost reflective and the rate of return generated by the pipeline; and

§ compare its offer with the prices paid by other shippers for comparable services, if the limitations outlined in section 3.3.2.2 can be overcome.

Like Option 4, if the limitations with price reporting cannot be overcome, then the publication of the price information is unlikely to provide any additional value to shippers.

Having said that, even if a shipper does not use the information in this way, its publication can be expected to impose greater discipline on pipeline operators when

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setting prices, because there will be greater clarity about the returns being earned and if some shippers are paying considerably more than others.

3.4.6 Implementation issues

Irrespective of the option that is selected, there are a number of implementation issues that need to be considered, including:

§ the pipeline operators that would be subject to the information disclosure requirements and the extent to which any exemptions would be available;

§ the compliance framework that will apply to the new information disclosure framework;

§ the manner, form and frequency with which information should be published; and

§ how any confidentiality issues will be dealt with; and

§ how any costs associated with access requests will be recovered.

3.4.6.1 Pipeline operators that would be subject to disclosure requirements

Given the costs associated with information, it is relevant to consider whether all non-scheme pipeline operators would be required to comply with the disclosure requirements, or if exemptions would be available.

The GMRG’s preliminary view is that an exemption mechanism should be incorporated into the new disclosure framework to allow transmission and distribution operators to seek an exemption from some or all the reporting requirements if the cost of disclosure is expected to outweigh the benefit. The type of exemptions that the GMRG is currently considering are:

§ An exemption from all the disclosure requirements if:

o the non-scheme pipeline is not providing third party access;77 or

o the non-scheme pipeline is a single shipper pipeline and this is not expected to change in the foreseeable future.

If either of these circumstances were to change, the exemption would expire and the pipeline would be required to start disclosing the relevant information.

§ An exemption from the requirement to publish financial reports and cost, demand and financial information if the size of the non-scheme pipeline falls below a minimum reporting threshold. This exemption could be applied in a similar manner to Canada, where smaller pipelines are only required to disclose this information if they receive an access request. Alternatively, it could be applied in a more absolute manner, with pipelines below the reporting threshold not being required to comply with the disclosure requirements at all.

There are numerous metrics that could be used for the minimum reporting threshold, but ideally it would be aligned with the bulletin board reporting

77 The Braemar Pipeline, which is owned by Alinta and is used to supply Alinta’s gas fired Braemar power station is a good example of this type of pipeline.

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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 would be reduced to 10 TJ/day. Consistent with the proposed rule change, the GMRG is considering a 10 TJ/day threshold.

Two other types of pipelines that the GMRG has identified as potential candidates for exemptions, but has decided not to make provision for at this stage are:

§ non-scheme distribution pipelines; and

§ pipelines that are subject to a 15-year no coverage determination.

In relation to the latter of these categories, it is worth noting that while a specific exemption would not be available to pipelines subject to a 15-year no-coverage determination, the GMRG expects the majority (if not all) of pipelines subject to a 15-year no-coverage determination to be able to seek an exemption on the basis that the pipeline does not provide third party access, or is a single shipper pipeline and this is not expected to change in the foreseeable future.

The GMRG is interested in getting further feedback on exemptions from stakeholders.

If a decision is made that the prices actually paid by shippers should be published, but that the information should be aggregated to protect the anonymity of parties, then an exemption from reporting this information may also be required if there are less than three shippers using the pipeline.

The AER would appear to be the most logical candidate for overseeing the exemption mechanism, but the GMRG is interested in hearing stakeholders’ views on this issue. The GMRG is also interested in hearing stakeholders’ views on the need for an exemption mechanism, the scope of the proposed exemptions and if any other exemptions may be warranted.

3.4.6.2 Compliance framework

Section 27 of the NGL requires the AER to monitor, investigate and enforce compliance with the NGL, NGR and Procedures. The introduction of the disclosure framework in the NGR will therefore mean that the AER will have a role in monitoring and enforcing the reporting obligations, which the GMRG considers appropriate.

Under the NGL, the enforcement tools that the AER could employ if a pipeline operator failed to comply with the disclosure requirements, would differ depending on whether the disclosure framework is classified as a civil penalty provision. If it is not classified in this way, then the AER would only be able to:

§ seek an administrative resolution, which may include a voluntary commitment by the operator to rectify non-compliance; or

§ institute civil proceedings in the Federal Court and seek an injunction or an order that the pipeline operator cease or remedy the conduct.

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If, however, it was classified as a civil penalty then the AER would also 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.

The GMRG is aware that in its East Coast Review the AEMC considered the value of classifying the bulletin board provisions in the NGR as civil penalty provisions and concluded that this classification was appropriate given the reliance market participants can place on the information when making decisions.78

For similar reasons to those cited by the AEMC, the GRMG’s preliminary view is that the new disclosure framework should be classified as a civil penalty provision so that shippers can have some confidence in the information that is disclosed, but it would be interested in hearing stakeholders’ views on this issue. The GMRG is also interested in getting stakeholders’ views on whether a reporting standard should be included in the new disclosure framework, which, amongst other things, could state that information provided by the pipeline operator must not be knowingly false or misleading.

3.4.6.3 Manner, form and frequency with which information is published

To enable shippers to access the information outlined above, pipeline operators would be expected to publish the information on their website (or if the information is already available on a bulletin board, a link to the relevant bulletin board) in a readily accessible location.

If a decision is made to require the provision of financial reports and/or cost, demand and financial information, then there could be value in developing a guideline that specify what information is to be reported, in what format and any reporting principles to be employed. The guideline could be binding (i.e. if pipeline operators are required to comply with the guidelines under the NGL or the Rules) or could provide guidance only. The GMRG is interested in hearing stakeholders’ views on this issue.

If the AER is required to develop guidelines and pipeline operators are not required to start reporting until after the guideline is completed, then some transitional arrangements may be required. This issue is discussed in further detail in Chapter 6.

The GMRG is also interested in getting stakeholders’ views on the frequency with which information should be disclosed, with the current expectation being that:

§ the information shippers require when considering whether to access a pipeline should be available at all times and should also be kept up to date;

§ if financial reports and/or cost, demand and financial information are to be disclosed, then it should be published on an annual basis within four months of the end of the pipeline’s financial year; and

§ if the prices paid by shippers are to be disclosed, then the information should be available at all times and should be updated shortly after a new agreement has been entered into, or when an existing agreement ends.

78 AEMC, Stage 2 Final Report: Information Provision – East Coast Wholesale Gas Market and Pipeline Frameworks Review, 23 May 2016, pp. 41-42

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3.4.6.4 Confidentiality

If a decision is made that the prices actually paid by shippers should be disclosed and that information should be aggregated to protect the anonymity of shippers, then it may be necessary to include a confidentiality mechanism in the disclosure framework. The GMRG’s preliminary view is that the confidentiality mechanism would be overseen by the AER and that pipeline operators would be able to seek an exemption from disclosing the prices payable for some services, if they could demonstrate that the disclosure would reveal who the shipper(s) are.

For example, if there were only two shippers using a zone 1 transportation service on the Eastern Gas Pipeline, then the publication of the range of zone 1 prices could reveal the identity of the shippers. There could therefore be a case for the zone 1 prices not to be published if a decision is made that the anonymity of shippers should be protected.

The GMRG is interested in understanding how significant an issue this is likely to be and if there are any specific principles that stakeholders think should be taken into account by the AER.

3.4.6.5 Costs

Although the provision of information will give rise to costs, the GMRG would expect most of the costs to be treated as a business as usual cost and recovered from shippers through the charges levied by the pipeline operator.

One potential exception to this general rule, is that if a shipper seeks access to a service that requires the pipeline operator to carry out an investigation into the option.79 In this case, it would be reasonable for the pipeline operator to recover the costs from the shipper (either through an explicit up front charge or through the agreed price).

The way in which this type of situation would be treated would ideally be set out in the pipeline operator’s negotiation framework, but the GMRG is interested in getting further feedback on this issue and understanding if there are any other circumstances in which it would be reasonable for the pipeline operator to recover the costs of providing information.

79 For example, if the pipeline needs to be expanded the pipeline operator may incur costs carrying out a front-end engineering design study.

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4. Arbitration mechanismDuring the Examination shippers raised a number of concerns about the market power that pipeline operators can wield in negotiations and noted that the market power can be significant in those cases where a shipper has no other option but to use the pipeline.80 Shippers also claimed that the current test for regulation does not pose a credible threat to non-scheme pipelines and is not therefore constraining their behaviour during negotiations.81

The Examination found there was some substance to these claims and noted that the ability of pipeline operators to wield their market power, coupled with the information asymmetries outlined in Chapter 3, was resulting in a significant imbalance of bargaining power between pipeline operators and shippers.82

The Examination concluded that the most effective means of addressing the negotiating imbalance would be to institute a credible threat of intervention in the event commercial negotiations fail. It was therefore recommended that a framework for binding arbitration be introduced into the NGL and be available on all non-scheme pipelines in the event parties are unable to reach a commercial agreement. As noted in the Examination, a robust arbitration framework, coupled with appropriate information disclosure, should incentivise parties to reach agreement through commercial negotiations and thus rarely be triggered.

On an indicative basis, the Examination noted that the arbitration framework would encompass the following characteristics:83

1. Commercial negotiation between parties would occur whenever any party sought pipeline services on an open access pipeline.

2. The existing provision for a fifteen year ‘no-coverage period’ would be retained and during that period any negotiations on services in the foundation contracts would be governed by the provisions of those contracts. However, negotiations involving parties to those foundation contracts relating to services not covered in those contracts, or involving a new party, would be subject to the arbitration framework.

3. After negotiations had commenced either party could signal a breakdown, which would trigger the arbitral process.

4. The arbitration would be commercially-based (as distinct from judicial or regulatory based), with the arbitrator appointed by mutual agreement of the parties, but with provision for imposition of an arbitrator where there is no agreement. The framework would be designed for expeditious resolution of the dispute with provisions to avoid delay and gaming. Structures such as ‘final offer arbitration’ would be considered for inclusion.


81 Ibid, p. 80.82 Ibid, p. 12.83 Ibid, p. 15.

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5. The decision of the arbitrator would be binding on both parties.

6. Oversight and maintenance of the framework would be required, including in relation to procedural rules, pricing principles and the power to appoint an arbitrator to a dispute in the absence of agreement between the parties. The AER is the logical institution to undertake this role.

To give effect to this recommendation, new heads of power will be introduced into the NGL, through the Amendment Bill. The head of power provides for a new commercial arbitration framework for non-scheme pipelines. Consistent with the characteristics outlined above, the draft Amendment Bill provides for:

§ either the ‘prospective user or user’ (referred to in this paper as ‘the shipper’) of a pipeline, or the operator of that pipeline, to trigger the commercial arbitration process if commercial negotiations break down by notifying the AER of an access dispute;

§ the parties to appoint an arbitrator by mutual agreement but, if the parties are unable to agree upon an arbitrator, it shall be appointed for them by the AER;

§ the access determination made by the arbitrator to be binding; and

§ the AER to oversee the arbitration framework.

It is worth noting in this context that while the arbitration mechanism is intended to have attributes of commercial arbitration, it is to be provided for by a statutory instrument, the NGL and NGR. The framework provided by the draft Amendment Bill also includes features of the existing regulatory dispute resolution framework provided under the NGL (for example, the draft Amendment Bill similarly applies Chapter 6, Part 6 of the NGL which relates to hearing procedures). Consideration has therefore been given to both commercial arbitration mechanisms and the arbitration mechanisms used in other statutory instruments when developing the options for the new arbitration framework that will be given effect in the Rules.

The remainder of the chapter focuses on the options for the way in which the new commercial arbitration framework could operate, while the following chapter focuses on the principles that could be used to guide the arbitrator’s decision under this framework. Commencing with an overview of the role that arbitration can play in resolving disputes, this chapter then examines commercial arbitration mechanisms and the arbitration mechanisms used in other infrastructure access regimes, with particular emphasis placed on:

§ how the dispute resolution mechanism can be triggered;

§ the form the arbitration takes;

§ the identity of the arbitrator and appointment process;

§ the procedural rules;

§ the content of a determination (or award);

§ confidentiality requirements;

§ applicable time limits; and

§ the apportionment of costs.

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The chapter then presents options for the design of the new arbitration mechanism. The GMRG’s preliminary view on the option that should be implemented is presented in Chapter 6, while Chapter 7 sets out some specific questions to guide stakeholder feedback.

4.1 Role of arbitration in resolving disputes

Arbitration is a widely-used method of resolving disputes that fail to be settled by negotiation. While arbitration mechanisms can vary substantially in design, their central feature is that they involve a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed, or legislation has decreed, will be final and binding. There are often limited rights of review and appeal of arbitration awards.

Parties often seek to resolve disputes through arbitration because of a number of potential advantages over judicial proceedings:

§ Choice of decision-maker: In contrast to litigation, where one cannot ‘choose the judge’, arbitration allows the parties to choose their own adjudicator. This is particularly useful when the subject matter of the dispute is highly technical, as arbitrators with an appropriate degree of expertise can be appointed so the matters in dispute will be more readily understood. It also ensures the arbitrator’s independence and impartiality.

§ Timeliness: Arbitration is often faster than litigation in court, with hearings generally shorter, procedures more flexible and preparation less demanding.

§ Confidentiality: Arbitration hearings are generally confidential and final decisions are not published.

§ Convenience: Hearings are arranged at times and places that suit the parties, arbitrators and witnesses.

§ Flexibility: The procedures are more flexible, with the arbitrator, in consultation with parties, determining how the arbitration will be run according to the circumstances.

§ Finality: In many legal systems there are limited avenues for appeal of an arbitral award, which is sometimes an advantage because it limits the duration of the dispute and any associated liability.

§ Costs: The costs associated with arbitration may be less than pursuing the dispute through trial. While one, or both, of the parties will pay for the arbitrator’s services, this should be compensated for by the potential for the increase in the efficiency of arbitration to reduce the other costs involved.

There are also a number of potential disadvantages associated with arbitration:

§ Splitting the difference: the arbitrator may make a determination that, rather than determining in one side or the others favour, splits the difference by giving each side part of what they requested. Thus, both parties leave the table feeling dissatisfied because neither party’s interests have been served.

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§ Limited appeal: There are generally very limited avenues for appeal, which means that an erroneous decision cannot be easily overturned. Thus, if the arbitrator makes a mistake the losing party often has no remedy.

§ Discovery of information: Discovery may be more limited in arbitration.

§ Narcotic/Chilling Effects: The chilling and narcotic effects are two related concepts, which many theorists believe to be inadequacies of interest arbitration. Chilling occurs when neither party is willing to compromise during negotiations in anticipation of an arbitrated settlement and usually occurs when the two parties take extreme positions and are not willing to budge. The narcotic effect, on the other hand, refers to an increasing dependence of the parties on arbitration, resulting in a loss of ability to negotiate.

4.2 Commercial arbitration

Dispute resolution mechanisms are commonly outlined in commercial agreements. The dispute resolution clause will ordinarily outline what process and form of dispute resolution will be used (for example, mediation, conciliation or arbitration) and in accordance with particular rules of procedure, often provided by dispute resolution institutions.

Commercial arbitration, often referred to as ad-hoc arbitration, is conducted pursuant to an arbitration agreement between the parties in dispute. An arbitration agreement is an agreement in writing to refer disputes of a commercial nature that arise under a contract for resolution by arbitration.

The procedures referred to in arbitration clauses are often those of arbitration institutions that are mutually agreed to represent best practice. There are a number of commercial arbitration rules provided by different institutions that set out procedural rules upon which parties may agree for the conduct of arbitral proceedings arising out of their commercial relationship. Some of the widely used arbitration rules available for commercial arbitration include:

§ the International Chamber of Commerce International Court of Arbitration Rules;

§ the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules;

§ the Australia Centre for International Commercial Arbitration (ACICA) Rules 2016; and

§ the Resolution Institute Arbitration Rules.

These institutions often also offer model dispute resolution clauses that can be included in contracts. For example, the Australian Centre for International Commercial Arbitration (ACICA) provides model arbitration clauses for use within a contract, free of charge.84

84 See Australian Centre for International Commercial Arbitration (ACICA), ACICA Model Arbitration Clause, https://acica.org.au/acica-model-arbitration-clause/ (accessed on 20 February 2017).

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https://acica.org.au/acica-model-arbitration-clause/

Some insight into the dispute resolution clauses that have been employed in gas transportation agreements (GTAs) can be found in Box 4.1.

Box 4.2: Dispute resolution clauses in GTAs

The GMRG understands that all gas transportation agreements (GTAs) contain some form of dispute resolution clause, although they are seldom drawn upon and instances of arbitrated disputes are reportedly rare. The GMRG is also aware that the design of these dispute resolution clauses can vary depending on the requirements of the pipeline operators and shippers that are party to the agreements.

Given the confidential nature of GTAs, a comprehensive assessment of these clauses has not been possible and the exact nature of these clauses remains largely unknown. The GMRG has, however, reviewed the dispute resolution mechanisms in a variety of pipeline operator’s publicly available standard contracts, including:

§ APA Group;

§ Jemena, in relation to the Eastern Gas Pipeline (EGP);

§ DBP Transmission, in relation to the Dampier to Bunbury Natural Gas Pipeline (DBNGP); and

§ Tas Gas Networks.

The dispute resolution clauses in each of these contracts are reproduced in Appendix B. As this appendix highlights, the mechanisms used by each pipeline provide for a similar process to be followed (notification and escalation of the dispute). However, the nature, type and form of the dispute resolution varies markedly across pipeline operators.

The other point to note about these clauses is that access to commercial arbitration can only be sought by shippers that are party to the contract. Shippers seeking access to services on non-scheme pipelines that do not have a contract in place with the pipeline operator cannot therefore access this mechanism unless the pipeline operator mutually agrees to go to arbitration.

Finally, it is worth noting that most GTAs do not provide for any form of price review. The dispute resolution mechanisms in these GTAs do not therefore contemplate an arbitrator having to make a determination on the price to be paid for services, so there is little guidance in these mechanisms on the pricing or other principles that could be employed in the arbitration mechanism.

Prior to 2010, domestic legislation regarding commercial arbitration varied between the different states and territories within Australia. At the Standing Committee of Attorneys-General meeting held on 7 May 2010, it was agreed to implement the Model Commercial Arbitration Bill 2010 as a means of creating a uniform domestic arbitration law. With the exception of the Australian Capital Territory, which introduced the Commercial Arbitration Bill 2016 (ACT) on 15 December 2016, all Australian states and territories have adopted and enacted versions of the Model Bill creating a uniform framework for domestic arbitration in Australia.

The Model Bill is based on the provisions of the 2006 United Nations Commission on International Trade Law (UNCITRAL) Model Law, the current international benchmark for arbitral laws. The paramount objective of the new Commercial Arbitration Acts (CAAs) is to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense.85

85 See for example Commercial Arbitration Act 2010 (NSW), section 1C.

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Given the objective is to provide a commercially-focused arbitration framework, the domestic commercial arbitration legislative context will be taken into consideration in relation to different design elements. The CAAs in each jurisdiction implement the Model Bill in a largely uniform manner, although some minor variations do exist. For the purposes of this paper, the Commercial Arbitration Act 2010 (NSW) is referred to throughout.

4.3 Arbitration mechanisms in other access regimes

While the arbitration mechanism will be commercially-focused, it is relevant to consider the way in which the arbitration mechanisms in other access regimes have been designed. A range of domestic and international arbitration mechanisms have therefore been examined in the development of this options paper. Further detail on some of these mechanisms is provided below and in section 4.4, which focuses on the arbitration design components.

4.3.1 Domestic arbitration examplesThere are a number of arbitration mechanisms used at both a national and jurisdictional level in Australia to resolve disputes concerning access to infrastructure, including, amongst others, the arbitration mechanism available under:

§ the NGL to users of scheme (full and light regulation) pipelines;

§ Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA);

§ the Port Terminal Access (Bulk Wheat) Code of Conduct;

§ the South Australian Ports Access Regime;

§ the Western Australian Rail Access Regime; and

§ the Australasia Railway Access Regime (NT – SA Railway).

Box 4.3 provides an overview of these regimes, while Table 4.6 provides a summary of the key features of the arbitration mechanisms used under the national access regimes (i.e. the NGL, the CCA and the Port Terminal Access Code of Conduct). Appendix C provides further detail on the state based regimes.

Box 4.3: Arbitration mechanisms in national and jurisdictional access regimes

Arbitration available for scheme pipelines under the NGLThe NGL provides a dispute resolution framework for parties experiencing difficulty accessing services on a scheme pipeline (a pipeline subject to light or full regulation).

The process for dealing with access disputes is set out in Chapter 6 of the NGL, including in relation to the notification of an access dispute, access determinations, compliance, hearing procedures and miscellaneous matters, such as the correction of clerical mistakes. The arbitration framework outlined in the draft Amendment Bill draws upon Chapter 6 and takes a largely consistent approach.

Under this framework, the AER (or the ERA in Western Australia) is the dispute resolution body and is responsible for making a determination on access.86 The AER has the ability to require the parties, in accordance with the NGR, to mediate, conciliate or engage in another alternative dispute resolution process for the purpose of resolving the

86 National Gas Law, section 184.

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dispute.87 Part 12 of the NGR also outlines further requirements relating to scheme pipeline access disputes.

It is worth noting that Chapter 15C of the NGR provides for a dispute resolution process in relation to wholesale energy market disputes, but ‘access disputes’ are specifically excluded.88

Arbitration under Part IIIA of Competition and Consumer Act 2010 (Cth)Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA), establishes a legal regime, known as the National Access Regime, to facilitate third party access to services provided by infrastructure facilities with natural monopoly characteristics.

Under Part IIIA of the CCA, third parties seeking access to a particular service provided by an infrastructure facility of national significance may apply to the National Competition Council (NCC) for that service to be ‘declared’. The NCC must then consider the application having regard to the declaration criteria in the CCA before making a recommendation to the designated Minister, who is responsible for deciding whether to declare the service.

Where a service has been declared and an access seeker and provider cannot agree on the conditions of access, either party may request the ACCC arbitrate the dispute.

Arbitration under Port Terminal Access (Bulk Wheat) Code of ConductThe Port Terminal Access (Bulk Wheat) Code of Conduct, made on 30 September 2014, regulates the conduct of bulk wheat port terminal operators. The ACCC is responsible for enforcing the regulations in the Code and monitoring compliance. Unlike the previous Bulk Wheat access undertaking regime, the ACCC does not have any role arbitrating disputes between port terminal service providers and access seekers.

An arbitration under the Code must be conducted by an independent arbitrator. Parties appoint the arbitrator, or in the event agreement cannot be reached the Institute of Arbitrators & Mediators Australia makes the appointment. Similar to the draft Amendment Bill, the parties share the costs associated with the arbitration process (for example, arbitrator’s fees and room hire) and bear their own costs of participation. The Code provides for a more commercially-focused arbitration that simply requires the arbitrator to determine the terms of the access agreement and notify the parties of the terms, without specifying the time in which the arbitrator must make the determination or the procedures that must be complied with.

State based access regimes Under Part IIIA of the CCA if a State or Territory that is party to the Competition Principles Agreement (CPA) has established an access regime, the responsible Minister for the State or Territory may apply to the NCC asking the NCC to recommend that the Commonwealth Minister decide that the regime for access to the service is an effective access regime (subsections 44M(1) and (2)). The NCC must recommend to the Minister that he or she decide that the access regime is either an effective access regime for the service, or not an effective access regime for the service. In making a decision under section 44N, the Minister must apply the relevant principles in the CPA, treating those principles as guidelines rather than binding rules, and must have regard to the objects of Part IIIA of the CCA and not consider any other matters.The three access regimes listed above have been certified as effective and examined by the GMRG.

87 Ibid, section 185.88 National Gas Rules, rule 135F.

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Table 4.6: National arbitration mechanismsNational Gas Law (NGL) (Chapter 6) Competition and Consumer Act 2010 (Cth) (CCA) Port Terminal Access (Bulk Wheat) Code of

ConductBackground The NGL provides a dispute resolution framework

for parties experiencing difficulty accessing pipeline services on a regulated pipeline.

Part IIIA of the CCA establishes a legal regime, known as the National Access Regime, to facilitate third party access to services provided by infrastructure facilities with natural monopoly characteristics.

Regulates the conduct of bulk wheat port terminal operators. The ACCC monitors and enforces the Code under the CCA.

Purpose The National Gas Objective is to: ‘…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’.

§ to promote the economically efficient operation of, use of, and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets

§ to provide a framework and guiding principles to encourage a consistent approach to access regulation in each industry.

To regulate the conduct of port terminal service providers to ensure that exporters of bulk wheat have fair and transparent access to port terminal services.

Applicable to Australian gas ‘scheme’ pipelines (covered pipelines that are subject to light or full regulation)

Not limited to any particular industries, services provided by facilities such as railway tracks, airports, port terminals or sewage pipes. Sets out a number of mechanisms by which terms and conditions of access to infrastructure services may be determined: declaration and arbitration, access undertakings and the certification of effective state access regimes.

Australian port terminal service providers

‘Dispute’ Refers to a dispute between a user or prospective user and a service provider about 1 or more aspects of access to a pipeline service provided by means of a scheme pipeline.

Refers to a dispute between a third party and service provider regarding one or more aspects of access to a declared service.

A dispute in relation to:§ the proposed terms of the access agreement;§dealing with an incomplete application§whether the port service provider is satisfied on reasonable grounds of the exporters details

Dispute resolution available

AER may require the parties to mediate, conciliate or engage in another alternative dispute resolution process for the purpose of resolving the dispute.

Where a service has been declared and an access seeker and provider cannot agree on the terms and conditions of access to that service, either party may request in writing for the ACCC to arbitrate the dispute.

Mediation – clause 14Arbitration – clause 15

Arbitration AvailableForm Regulatory arbitration Regulatory arbitration Independent arbitration provided by statutory

instrumentArbitrator AER ACCC Independent ArbitratorHow dispute resolution clause can be triggered

A prospective user, user or service provider may notify the AER, in writing, that an access dispute exists.AER must notify the service provider or prospective user or user (as the case may be) of the access dispute in writing.

Either the provider or the third party may notify the Commission in writing that an access dispute exists, but only to the extent that those aspects of access are not the subject of an access undertaking that is in operation in relation to the service. ACCC must give notice of dispute to: the provider and/or third party, and any other person the ACCC thinks may want to become a party to the dispute.

Party may by notice in writing to the other party, refer the terms of the agreement to be determined by an arbitrator. Must notify the ACCC of:(a) the first party’s intention to proceed to

arbitration;(b) the nature of any dispute between the parties;(c) whether the parties have agreed on the

appointment of an arbitrator.Appointment of arbitrator

Not specified ACCC is to be constituted by 2 or more members of the Commission nominated in writing by the Chairperson.

If the parties fail to agree within 15 days after the notification, the first party must request the Institute of Arbitrators & Mediators Australia to appoint.

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National Gas Law (NGL) (Chapter 6) Competition and Consumer Act 2010 (Cth) (CCA) Port Terminal Access (Bulk Wheat) Code of Conduct

Procedure AER may require evidence or argument to be presented in writing, and may decide the matters on which it will hear oral evidence or argument. Hearing may be held by telephone, CCTV or other means of communication.AER given particular powers by section 199, including may refer a matter to an expert.

ACCC may require evidence or argument to be presented in writing, and may decide the matters on which it will hear oral evidence or argument. Hearing may be held by telephone, CCTV or other means of communication.ACCC given particular powers by section 44ZG, including may refer a matter to an expert.

Not specified

Determination AER may make an interim determination.Access determination may deal with any matter relating to the provision of pipeline services. Determination must be in writing, include a statement of reasons and be given to parties without delay. Determination may, but need not, require a service provider to provide access.

The ACCC must make a written final determination and may make an interim determination. The ACCC must also provide a draft determination to the parties.Determination may deal with any matter relating to access, including matters that were not the basis for notification of the dispute. The ACCC must provide reasons for the determination.

The arbitrator must determine the terms of the access agreement and notify the parties of the terms.

Confidentiality Hearings are conducted in private unless otherwise agreed.Parties may request that material is kept confidential (from the other party).

Arbitration hearings are conducted in private, unless otherwise agreed by the parties. Parties may request that material is kept confidential.A written report is published on a final determination and may include the whole or part of the determination. ACCC allows parties to identify confidential information which must have regard to before publishing the report.

Not specified

Time limits No time prescribed. Final determination within the period of 180 days (expected period) starting when the application is received. In working out the expected period certain prescribed circumstances ‘stop the clock’.

No time prescribed.

Costs Each party bears its own costs, unless the AER orders that a party pay all or a specified part of the costs of another party in a dispute hearing.

The Regulations 2010 (Cth) set out the costs the ACCC may charge for arbitration, including a pre-hearing fee and hearing fee. A prehearing fee is payable by the person who notified the access dispute. A hearing fee is apportioned by the ACCC between the parties.

Parties must bear their own costs. Parties are equally liable for the following costs unless they agree otherwise: arbitrator costs; room hire; any additional input agreed by both parties; and any other costs determined by the arbitrator.

Operation Determination has effect on and after the date specified in the determination.A party to an access dispute in respect of which an access determination is made must comply with the access determination.

If none of the parties to the arbitration applies to the Tribunal for a review of the final determination, the determination has effect 21 days after it is made. Any or all of the provisions of a final determination may apply from a specified day that is earlier than the day on which it takes effect, in doing so the ACCC must have regard to guidelines.

The port terminal service provider concerned must offer to enter into an access agreement with the exporter concerned on the terms determined by the arbitrator within 3 business days of being notified of the terms.

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As Table 4.6 highlights, the design of these arbitration mechanisms varies markedly, with the objective and form of the mechanisms in the NGL and Part IIIA being more consistent with the standard regulatory arbitration model. The equivalent provisions in the Port Terminal Access (Bulk Wheat) Code of Conduct, on the other hand, are more commercially focused. Differences can also be seen across a number of design elements, including:

§ the form the arbitration takes;

§ the identity of the arbitrator;

§ the procedural rules;

§ the content of a determination (or award);

§ confidentiality requirements;

§ applicable time limits; and

§ the apportionment of costs.

4.3.2 International arbitration examplesThe GMRG examined the access regimes applying to gas pipelines in other jurisdictions, including the US, Canada, New Zealand and the EU. However, none of the international jurisdictions have a comparable arbitration mechanism.89 Accordingly, two international arbitration mechanisms in other industries have been drawn upon: the New Zealand utilities access regime and the Canadian transportation access regime. An overview of these regimes is provided below. Further detail on these regimes can be found in Appendix D.

4.3.2.1 New Zealand Utilities Access

Established in September 2016, the National Code of Practice for Utility Operators' Access to Transport Corridors (the Code) is a legislated requirement under the Utilities Access Act 2010. The Code provides a nationally consistent and cooperative framework for corridor managers and utility operators, to manage transport corridors (road and rail) while also providing for the access rights of utility operators. The New Zealand Utilities Advisory Group (NZUAG) Incorporated is responsible for the administration and implementation of the Code.

The Code provides for independent arbitration by a sole arbitrator (who must be a New Zealand resident) under the Arbitration Act 1996 (NZ).90 The award of the arbitrator is final and binding on the parties. Similar to the Port Terminal Access (Bulk Wheat) Code of Conduct, the Code provides for a more commercially-focused arbitration that stipulates few requirements and leaves the arbitrator to determine how to run the arbitration, the time in which a determination is made and what to consider in making the determination.

89 The negotiated settlement regimes used in the US and Canada provide a form of adjudication, but in both cases a formal rate hearing process is used to resolve the dispute rather than an arbitration mechanism.

90 National Code of Practice for Utility Operators' Access to Transport Corridors (New Zealand), section 7.6.

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4.3.2.2 Canadian Transportation Access

In contrast to the commercial arbitration approach adopted in New Zealand, the Canada Transportation Act contains several arbitration provisions designed to facilitate the resolution of rate and service disputes between carriers and shippers or transit authorities. The Act provides for three types of arbitration:

1. rail level of service arbitration;

2. final offer arbitration (FOA); and

3. rail arbitration.

The details associated with these different types of arbitration are outlined in Appendix D. It is important to note that the Canadian Transportation Agency (CTA), the regulatory body, undertakes rail level of service arbitrations. Rail arbitration can only be sought when both parties agree to go to arbitration and can be arbitrated by the CTA or by an independent arbitrator. Conversely, FOA is undertaken by an independent arbitrator (or panel of three arbitrators if parties agree) and the shipper or the urban transit authority may initiate the arbitration.

4.4 Design components

This section commences by highlighting the key characteristics of the arbitration mechanism and outlines the GMRG’s proposed approaches to a range of design components to reflect these characteristics. It goes on to consider the options available in relation to key design issues associated with the arbitration, including the form of arbitration, availability, procedural rules and timelines, and determination content. These key design components vary in the arbitration options presented in section 4.5.

4.4.1 Design proposals to reflect key arbitration characteristics

As outlined in the introduction to this chapter, the Examination, on an indicative basis, identified a range of characteristics that the arbitration framework should encompass and the draft Amendment Bill reflects many of these characteristics. Expanding on the draft Amendment Bill, the GMRG proposes that particular approaches are taken in relation to various design components to reflect the key characteristics of the arbitration mechanism, including that the arbitration mechanism:

§ provide for a voluntary, commercially-focused avenue to resolve disputes;

§ protect existing contracts;

§ avoid distorting investment and innovation in pipelines;

§ have appropriate oversight; and

§ provide for dispute resolution that is final and binding, and at the lowest cost to parties involved as possible.

Options are not presented to stakeholders on how these design components should be addressed. Rather, stakeholder views are sought on the proposed approaches

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and how the proposals should be practically implemented, including how the requirements should be drafted into the NGR.

4.4.1.1 Access proposals

The arbitration mechanism will provide a shipper and pipeline operator that are unable to agree on access to services provided by non-scheme pipelines with a voluntary avenue to resolve the dispute. Under the draft Amendment Bill,91 the shipper or non-scheme pipeline operator may notify the AER of an access dispute and seek arbitration. As reflected in section 216E of the draft 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. The voluntary arbitration mechanism provides a backstop, or last resort, avenue of overcoming disputes that cannot be settled through commercial negotiations.

Section 216F of the draft Amendment Bill sets out 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. A number of stakeholder raised concerns in their submission on the draft Amendment Bill that section 216F could predispose how commercial negotiations could take place.

The arbitration mechanism is not intended to dictate how commercial negotiation takes place or the processes used. The form and nature of requests for access from shippers or prospective shippers, as well as how pipeline operators respond to this request, are commercial matters for the parties involved. Negotiations with shippers will vary depending upon the complexity of their needs, the physical limitations of the pipeline and the sophistication of the party. As recognised by APGA in its submission to the draft Amendment Bill, commercial negotiations can take many forms and relate to one service on one pipeline, or many services on one pipeline or services on multiple pipelines owned by the same pipeline operator. Negotiations surrounding augmentations to pipelines will also vary in their complexity and the time required to respond to the request. The negotiations will also vary depending on the size of the shipper. For example, retailers that have a portfolio of gas supply and transportation contracts are likely to have increased bargaining power as a result of their size, understanding of the market and their needs relative to smaller parties. They would also have more resources to devote to the negotiation process.

Accordingly, it is proposed that the Rules specify that an access request must be made in writing and in accordance with the pipeline operator’s negotiation framework (as outlined at section 3.3.1), which should outline the process the shipper is to follow when making the access request and the information it must provide. This would require parties seeking access to submit a request in accordance with the pipeline operator’s negotiation framework in relation to the pipeline in which they seek access. Parties could be required under the Rules to

91 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216J.

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provide the AER with documentation demonstrating that they have complied with the negotiation framework.

This will provide pipeline operators with the flexibility to determine their own negotiation framework and provide shippers with certainty of the negotiation process. The Rules should specify that a pipeline operator and shipper must have complied with the negotiation framework before they can submit an access dispute notification to the AER. Combined with the requirement for parties to negotiate in good faith under section 216G of the draft Amendment Bill, this should in practice prevent shippers from bypassing commercial negotiations and going straight to arbitration.

Proposed approach: The Rules to require an access request to be made in writing and in accordance with the pipeline operator’s negotiation framework for the non-scheme pipeline to which the access is sought.

4.4.1.2 Protection of existing contracts

The establishment of the arbitration mechanism is not intended to interfere with the existing rights of parties under GTAs. Existing contractual rights are protected under section 216N of the draft Amendment Bill (See Box 4.4).

Box 4.4: Draft Amendment Bill - protection of existing contractual rights

Section 216N—Restrictions on access determinationsThe arbitrator must not make an access determination that world adversely affect in a material respect the interests of a genuine third party who already has access (or a right of access) to a non-scheme pipeline under an access contract or access determination.

Some pipeline operators have indicated that allowing new shippers to seek arbitrated terms and conditions could provide a disincentive to shippers from entering into foundation contracts and encourage shippers that do enter into such contracts to require the inclusion of ‘most favoured nation’ clauses in foundation contracts.92 Pipeline operators have claimed that this would undermine the certainty that the foundation contracts were designed to provide for the pipeline operator and financiers.

Some shippers, on the other hand, have raised concerns that existing foundation contracts will not benefit from any decrease in price that results from the information disclosure requirements and threat and/or use of arbitration. This may result in foundation contracts, where shippers are paying prices above what would be expected in a competitive or regulated environment, subsidising the lower prices able to be offered to other shippers.

While it is recognised these foundation contracts did not have the threat of arbitration to increase parity in negotiations, foundational contracts prices reflect the commercial conditions in which they were struck. As highlighted by the ACCC and reinforced by stakeholders during the Examination, competition to build a new

92 The inclusion of a most favoured nation clause provides some protection to the shipper that over the term of the contract that they will be no worse off than other shippers.

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pipeline (to which foundation contracts apply) can be effective in limiting market power. By negotiating prior to the pipeline being built, foundation shippers will usually be able to use the competitive tension between prospective pipeline owners to negotiate long-term contracts that are not affected by the exercise of market power. Further, it is understood that many GTAs incorporate a most favoured nation clause, providing some protection to these shippers from paying a price for pipeline services that is beyond that paid by other shippers for comparative services.

Proposed approach: 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.

4.4.1.3 Safeguards to avoid distorting investment and innovation

The arbitration mechanism needs to be designed to ensure it avoids deterring pipeline investment and innovation. The arbitration mechanism is intended to provide for investment and innovation in response to commercial rather than regulatory drivers. The arbitration process is not intended to emulate the AER regulatory process or provide for quasi-economic regulation. Parties may submit a coverage application to the National Competition Council (NCC) if they think a pipeline should be subject to economic regulation.

Regardless of which arbitration option is implemented, adequate safeguards must be in place to ensure pipeline operators are not forced by an access determination to augment a pipeline, such as through expansions, that are not appropriately funded or are not technically or economically feasible. These safeguards should, where appropriate, be consistent with those provided under the NGR regarding access determinations in relation to scheme pipelines. The relevant rule is provided in Box 4.5.

Box 4.5: National Gas Rules

Rule 118 - Access determination requiring expansion of capacity (Section 191 of the NGL)

(1) An access determination:

(a) may require the service provider to carry out an expansion of the capacity of the access dispute pipeline; but

(b) may not require the service provider to extend the geographical range of the access dispute pipeline.

(2) However:

(a) the service provider cannot be required to carry out an expansion of the capacity of a light regulation pipeline unless the prospective user funds the capacity expansion in its entirety; and

(b) the service provider cannot be required to fund, in whole or part, an expansion of the capacity of a full regulation pipeline unless the extension and expansion requirements of the applicable access arrangement provide for the relevant funding; and

(c) an expansion of capacity required under an access determination must be:

(i) technically and economically feasible; and

(ii) consistent with the safe and reliable operation of the pipeline.

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(3) A user or prospective user acquires no interest in a pipeline by funding an expansion of capacity of the pipeline in accordance with an access determination unless the service provider agrees.

Rule 118 restricts the circumstances in which the AER through an access determination can require a pipeline operator to expand the capacity of the pipeline in dispute. Further, the AER cannot require a pipeline operator to extend the pipeline that is subject to dispute in an access determination. 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 proposes excluding disputes in relation to pipeline extensions from being eligible to access the arbitration framework under the Rules. However, as outlined below at section 4.4.2.2 (scope of matters in dispute that should be eligible to be arbitrated), disputes in relation to other services that require further investment in a pipeline and are not subject to competition (i.e. they can only be provided by the pipeline operator) would be captured by the arbitration framework, including if:

§ an expansion of the capacity 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 (the physical connection between pipelines).

In the GMRG’s view, adequate safeguards must be in place to protect pipeline operators from being forced to invest in these new services. Consistent safeguards should be afforded under the Rules in relation to access determinations made in relation to non-scheme pipelines as scheme pipelines. The GMRG proposes that the Rules provide for an arbitrator to make an access determination (made under section 216L of the draft Amendment Bill) that requires the pipeline operator to carry out an expansion, conversion to a bi-directional pipeline, to develop a new receipt or delivery point, expand existing receipt or delivery points or an interconnection with another pipeline or pipelines. However, similar safeguards should be in place for these new services as provided by Rule 118.

Further, the arbitrator will be required to take into account certain principles in making a determination (see Chapter 5). These principles also have a role to play in ensuring that the arbitration mechanism avoids deterring pipeline investment and innovation.

Proposed approach:

1. The Rules should state that the pipeline operator cannot be required to carry out an augmentation unless the shipper funds the augmentation in its entirety,

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and the augmentation is technically and economically feasible and consistent with the safe and reliable operation of the pipeline.

2. Consistent with rule 118(3), 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.

4.4.1.4 Oversight by the AER

The draft Amendment Bill provides for the AER to be the ‘scheme regulator’ but does not define the role of the scheme regulator. As noted in the Examination, the AER is the logical institution to provide oversight and administration of the arbitration framework.

Scheme ‘administrator’ rather than ‘regulator’

The AER is the appropriate body to undertake the administration of the arbitration framework. However, given the arbitration framework is intended to be commercially-focused, the AER’s roles should be administrative in nature rather than regulatory.

The draft Amendment Bill gives the AER four main functions:

1. Parties may notify the AER of the existence of an access dispute (section 216H).

2. The AER must refer the dispute to arbitration unless it decides the arbitration should not proceed (section 216J).

3. In the event the parties are unable to agree to an arbitrator, the AER is responsible for appointing an arbitrator (section 216K(2)).

4. The AER has the power to join parties (section 216I).

In the GMRG’s view, the first function is administrative in nature and entirely appropriate. The AER needs to have oversight of the access dispute to ensure that the arbitration is conducted in accordance with the law and the Rules. This function does not affect the outcome of the arbitration but assures the correct processes and relevant timeframes are met.

The second function gives the AER the power not to refer the dispute to arbitration, if it considers that:

(a) The notification of the access dispute was vexatious; or

(b) The subject matter of the dispute is trivial, misconceived or lacking in substance; or

(c) The party who notified the access dispute has not negotiated in good faith; or

(d) A specified dispute termination circumstance has occurred; or

(e) There is some other good reason why the access dispute should not be referred to arbitration.93

93 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216J(2).

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This section is intended to provide some flexibility to the AER to not refer a matter to arbitration, but is not intended to be a complex, time consuming decision making process.

This affords the AER with a gatekeeper role, which is inconsistent with a commercially-focussed approach to arbitration and is beyond the administrative role foreseen by the Examination. Instead, the GMRG is of the view that the arbitrator should be responsible for determining whether to proceed with arbitration in the conditions provided for in (a) to (e). This provision is examined further at 4.4.2.2 in assessing the options available for the availability of arbitration.

The third function affords the AER with the power to select the arbitrator in the event the parties are unable to agree to the appointment of an arbitrator. This is consistent with the indicative characteristics of the arbitration framework outlined in the Examination report and is examined in further detail at section 4.4.1.5.

The fourth function gives the AER the power to join a party to an access dispute if it is of the opinion that the resolution of the access dispute may involve requiring another person to do something.94 Some stakeholders have indicated that the joining of third parties has no role in commercial arbitration. The GMRG is of the view that there may be circumstances when a third party should be joined in a matter. However, the AER should only be able to join a party to an access dispute on the agreement of the parties to the access dispute. This would allow parties to refuse to join a party to protect their commercial relationships and the confidentiality of the arbitration process.

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

Development of guides for the arbitrator and potential parties

An arbitration guide should be developed by the AER and published publicly on its website providing guidance to an arbitrator. The guide for the arbitrator would provide procedural information on the arbitration framework and the requirements of the arbitrator, including key steps, timeframes and the determination form/content. The guide would present the procedural requirements, as well as the key factors that should be considered by the arbitrator in determining the procedural rules of the arbitration. The guide would also provide links to relevant arbitration rules.

A guide or handbook should also be developed by the AER for potential parties to an arbitration, which would contain information such as:

§ Eligibility for arbitration, including on how an access proposal must be made and dispute notice provided.

§ Selecting the arbitrator.

§ The steps, procedural rules and timeframes involved.

§ The form and content of the determination.

94 Ibid, section 216I(b).

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§ Compliance with access determinations.

§ Costs.

Proposed approach:

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

2. The AER should publish information on its website explaining the arbitration mechanism, including key design components. The information could take the form of a handbook or guide.

4.4.1.5 Selection of arbitrator

Consistent with the indicative characteristics set out in the Examination report, section 216K the draft Amendment Bill (see Box 4.6) provides for the arbitrator to be appointed by mutual agreement of the parties, but with provision for the appointment of an arbitrator by the AER where there is no agreement.

Box 4.6: Draft Amendment Bill 2017

Section 216K - Selection of arbitrator(1) The parties to an access dispute may agree to appoint, in accordance with the Rules,

the arbitrator for the purposes of an access dispute that is to be referred to arbitration under this Part.

(2) If the parties do not agree to the appointment of an arbitrator within a period specified by the Rules, the arbitrator will be a person selected by the scheme administrator after consultation with the parties to the access dispute.

(3) The arbitrator must be a person who— (a) is independent of the parties to the dispute; and (b) is properly qualified to act in the resolution of the dispute; and(c) has no direct or indirect interest in the outcome of the dispute.

(4) If for some reason an arbitrator does not complete an arbitration, the parties may agree, in accordance with the Rules, to make a fresh appointment and, in default of agreement within a period specified by the Rules, the scheme administrator may, after consultation with the parties, make the appointment.

The arbitrator must be impartial and be properly qualified to resolve the dispute. Parties, and in the event of no agreement the AER, will need to carefully assess whether the arbitrator has the relevant experience and skills to resolve the dispute in accordance with section 216K(3)(b). Only arbitrators with relevant expertise should be eligible for appointment.

To assist parties and the AER to identify and assess suitably qualified arbitrators, the AER should be required under the Rules to maintain a list of arbitrators and publish it on its website. This list would 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

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Chapter 8 of the NER, published on the AER website.95 The list of arbitrators would provide information on the arbitrator, including their name, address, contact details and biography or Curriculum Vitae. This would allow parties to identify and assess arbitrators in a timely manner. Further, in the event parties cannot agree on an arbitrator, the AER should be required to use the list to select a suitable and available candidate to conduct the arbitration.

Requiring the AER to establish a list of persons who may act as an arbitrator under the NGL, is consistent with Canada Transportation Act which requires the CTA to establish a list of persons who agree to act as arbitrators in final offer arbitrations (FOA) or level of service arbitrations.96 The list must indicate if a person has declared having relevant expertise for FOA, and the nature of that expertise. The list of arbitrators is available on the CTA’s website and includes the following information: name; address; telephone number; fax number, email address; and website (if applicable).97 It also provides a biography and work sample for each arbitrator.

Further, the CTA have a comprehensive set of criteria for inclusion on their list of persons who agree to act as arbitrators (see Box 4.7).98

Box 4.7: CTA criteria for inclusion on list of arbitrators

Criteria for Inclusion on the CTA’s List of Persons who agree to act as arbitratorsThe arbitrators must be able to conduct an efficient and effective arbitration process and possess:§ Superior procedural skills and in-depth understanding of the rules of procedure.§ A superior understanding of the rules of evidence including the ability to understand,

interpret and use complex technical evidence presented by experts.§ An in-depth understanding of the rules of natural justice.§ The ability to deal with preliminary matters which may include, but not limited to,

directions on pleadings and disclosure of evidence, interrogatories, determination of the necessity for witnesses or experts.

§ The ability to maintain appropriate working relationships between the parties in an adversarial atmosphere.

§ The ability to organise and analyse quantitative and qualitative information.§ The ability to render independent and impartial awards, as well as clearly explain,

orally and in writing, the reasons behind them – all with due regard for tight time frames.

§ The ability to maintain accurate records of all proceedings.

95 See AER, ‘Pool of experts from which panels are selected’, https://www.aer.gov.au/about-us/dispute-resolution/wholesale-energy-market-dispute-resolution/pool-of-experts-from-which-panels-are-selected.

96 Canada Transportation Act, sections 169(1) and 169.42.97 See Canadian Transportation Agency, ‘List of arbitrators for sections 36.2, 169(1) and

169.42 of the Canada Transportation Act’, https://services.otc-cta.gc.ca/eng/list-arbitrators-sections-362-1691-and-16942-canada-transportation-act (Accessed 16 February 2017).

98 See Canadian Transportation Agency, ‘Criteria for Inclusion on the Canadian Transportation Agency’s List of Persons who Agree to Act as Arbitrators’, https://services.otc-cta.gc.ca/eng/criteria-inclusion-canadian-transportation-agency%E2%80%99s-list-persons-who-agree-act-arbitrators (Accessed 16 February 2017).

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https://services.otc-cta.gc.ca/eng/criteria-inclusion-canadian-transportation-agency%E2%80%99s-list-persons-who-agree-act-arbitrators

https://services.otc-cta.gc.ca/eng/criteria-inclusion-canadian-transportation-agency%E2%80%99s-list-persons-who-agree-act-arbitrators

https://services.otc-cta.gc.ca/eng/list-arbitrators-sections-362-1691-and-16942-canada-transportation-act

https://services.otc-cta.gc.ca/eng/list-arbitrators-sections-362-1691-and-16942-canada-transportation-act

https://www.aer.gov.au/about-us/dispute-resolution/wholesale-energy-market-dispute-resolution/pool-of-experts-from-which-panels-are-selected



§ An understanding of the dispute resolution processes of the Canadian Transportation Agency.

The above named competencies and skills will be demonstrated by experience and qualifications that meet the following:§ At least 10 years of experience doing complex commercial litigation or dispute

resolution which must include:§ Complex issues with significant dollar amounts or important principles at stake; and,§ Areas where complex evidence of a technical nature is presented by experts; and,§ Such areas but are not limited to: breach of contract, competition/antitrust law,

insolvency or bankruptcy, mergers and acquisitions, supplier-procurement disputes, restructuring, patent infringements.

ORExperience as a judge of a superior court who has presided over commercial cases or dealt extensively with commercial cases involving complex technical evidence provided by experts.ORExperience as an adjudicative tribunal member or counsel involved in revenue, price or rates setting hearings. Other Requirements: § Adequate insurance to cover the potential liabilities (minimum $1,000,000)§ Disclosure of conflicts of interest and information on potential bias§ Disclosure of fees§ Availability on short notice§ Willingness to travel will be considered an asset

Similarly, the Railways (Access) Code 2000 (WA) requires the Economic Regulation Authority (ERA) to establish a panel of persons that may be appointed as arbitrators under the Code. The ERA may only include a name of a person or remove a name of the person from the panel on the recommendation of the Western Australian Chapter of the Institute of Arbitrators and Mediators Australia or the Perth Centre for Energy and Resources Arbitration.99

Given the arbitration framework is new, there will not be arbitrators that have experience in undertaking arbitration under the NGL. Accordingly, in establishing a list of arbitrators, the AER should work with relevant institutions, such as the Resolution Institute and the Australian Disputes Centre, to identify potential candidates. Further, the AER should distribute materials explaining the arbitration scheme and skills and experience likely to be required. Further, as outlined in section 4.4.1.4 an arbitration guide should be made available on the AER’s website to provide guidance to arbitrators when hearing disputes under the NGL.

Timeframes

To ensure the selection of the arbitrator occurs in a timely fashion, timeframes must be provided under the Rules. The following timeframes are proposed:

§ The AER be required to refer the dispute to arbitration within five 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.

99 Railways (Access) Code 2000 (WA), clause 24.

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§ Upon receiving the notification of referral from the AER, the parties should have five business days to mutually agree to, and appoint, an arbitrator. Within that five day 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 five business days of being notified that parties are unable to agree.

The above timeframes would ensure an arbitrator is appointed within a maximum of 15 business days from when the AER is notified of an access dispute. Further information on the proposed timeframes for the arbitration process is provided at section 4.4.2.4.

Fresh appointment of arbitrator

Section 216K(4) of the draft Amendment Bill states that if for some reason an arbitrator does not complete an arbitration, the parties may agree, in accordance with the Rules, to make a fresh appointment and, in default of agreement within a period specified by the Rules, the AER may, after consultation with the parties, make the appointment.

In the GMRG’s view, the Rules should state that if parties wish 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 (whether the standard arbitration period stipulated for the arbitrator to provide a determination or an extended time frame if an extension was agreed by the parties). If the parties do not make a fresh appointment within the 10 day period specified, but at least one party wishes to continue with arbitration, they must notify the AER. The AER must, after consultation with the parties, make a fresh appointment within 5 days of being notified of the need for the fresh appointment.

Given parties would have assessed potential arbitrators at the commencement of the arbitration, they should be in a position to ascertain suitable arbitrators and identify their availability in a short period of time. The time period of 10 days to appoint a fresh arbitrator provides adequate time for parties to seriously consider if they wish to recommence arbitration or come to an agreement via through negotiations.

Proposed approach:

1. The AER be required under the Rules to 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 are provided under the Rules to ensure an arbitrator is appointed within a maximum of 15 business days from when the AER is notified of an access dispute.

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 the access seeker wishes

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to continue with arbitration, they must notify the AER. The AER must, after consultation with the parties, make a fresh appointment within 5 days of being notified of the need for the fresh appointment.

4.4.1.6 Binding nature

As outlined in the Examination, the arbitration determination is intended to be final and binding on parties. If parties choose to go to arbitration, they do so recognising the risks involved.

The draft Amendment Bill provides for an access determination to be enforceable as if it were a contract between the parties to the access determination.100

A shipper that is party to an access determination should not be bound to seek access to the services but if access is sought or obtained then the shipper must be bound by any relevant provision of the access determination. The shipper should not be forced into seeking access when the price or terms and conditions associated with the determination would cause financial distress and/or the conditions associated are too onerous to allow them to comply. If the arbitration did not meet the needs of the shipper, it may decide not to enter into a contract. However, if the shipper does wish to access the pipeline service or services arbitrated, it should be bound to the price, terms and conditions outlined in the determination unless parties agree to vary the determination in accordance with section 216R of the draft Amendment Bill and consistent with the process outlined in the Rules.

Only the shipper should have the option to opt-out of accessing the services sought in the determination. Should the shipper wish to enter a contract on the arbitrated terms and conditions the pipeline operator will be bound to do so. This will provide a strong incentive to pipeline operators to effectively negotiate with shippers and come to commercial solutions, avoiding arbitration altogether.

Variation of access determination

To ensure an access determination can accommodate the changing needs of parties (subject to the terms and conditions of a determination), provision should be made for parties to seek variation in certain circumstances. The draft Amendment Bill provides for variation of access determinations under section 216R as outlined in Box 4.8.

100 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216Q.

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Box 4.8: Draft Amendment Bill

Section 216R - Variation of access determinations(1) An access determination may be varied by agreement between all parties to the

access determination.

(2) The Rules may also contain provisions with respect to seeking variations to an access determination.

(3) The provisions of this Chapter about the arbitration of an access dispute apply with necessary modifications to a proposal under the Rules to vary an access determination or to a dispute arising out of such a proposal.

The Rules must set out the process in which parties can seek variation to an access determination. Either party should be permitted to apply to the AER to vary an access determination.

Given the commercial focus of the arbitration mechanism, parties wishing to vary an arbitration agreement should apply to the AER in writing identifying the variation sought and provide evidence of agreement between both parties to the variation. This evidence could take the form of a letter signed by representatives of an appropriate level from both parties. This would ensure focus remains on encouraging parties to effectively negotiate and agreeing to the variation in advance of applying to the AER. This prevents the AER from needing to take a more formal process in ascertaining from the other party if they agree or object to the variation.

Further, in the event of a dispute regarding variation of the determination, parties should rely upon the dispute resolution clauses provided for under the GTA applying the arbitration determination. 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.

Enforcement

While the expeditious treatment of a dispute offers a number of benefits to the parties, any decision arrived at in an accelerated process is only valuable insofar as its enforceability is ensured. The draft Amendment Bill provides for the enforcement of an access determination to be in accordance with section 271 of the NGL, which applies to access determinations made by the AER in relation to regulated pipelines. Section 271 is provided at Box 4.9, including the additional provision made by the draft Amendment Bill (see point (5))).

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Box 4.9: National Gas Law – Section 271 (Chapter 8, Part 6)

217 - Enforcement of access determinations(1) If the Court is satisfied, on the application of a party to an access determination, that

another party to the determination has engaged, is engaging, or is proposing to engage in conduct that constitutes a contravention of the determination, the Court may make all or any of the following orders:

(a) an order granting an injunction on such terms as the Court thinks appropriate— (i) restraining the other party from engaging in the conduct; or (ii) if the conduct involves refusing or failing to do something—requiring the other

party to do that thing;(b) an order directing the other party to compensate the applicant for loss or damage

suffered as a result of the contravention; (c) any other order that the Court thinks appropriate.

(2) The revocation of an access determination does not affect any remedy under subsection (1) in respect of a contravention of the determination that occurred when the determination was in force.

(3) If the Court has power under subsection (1) to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do anything, the Court may make any other orders (including granting an injunction) that it thinks appropriate against any other person who was involved in the contravention concerned.

(4) A reference in this section to a person involved in the contravention is a reference to a person who has—

(a) aided, abetted, counselled or procured the contravention; or (b) induced the contravention, whether through threats or promises or otherwise; or (c) been in any way (directly or indirectly) knowingly concerned in or a party to the

contravention; or (d) conspired with others to effect the contravention.

(5) A reference in this section to an access determination includes a reference to an access determination under Chapter 6A.

If parties enter a GTA, or amend an existing GTA, implementing the arbitration determination, then if parties do not comply with their contractual requirements they may seek court proceedings for a breach of contract.

Under section 271, parties have the ability to apply to Court if they believe another party has engaged, is engaging or is proposing to engage in conduct that constitutes a contravention of the determination as implemented via a GTA between the shipper and pipeline operator involved.

Limited grounds of non-enforcement is consistent with the UNCITRAL Model Law, implemented domestically via the CAAs. Article 34 provides for the setting aside of an arbitral award, provided the application is provided within three months of the award, in the following circumstances:

§ The party applying for the award to be set aside furnishes proof that:

o a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the

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parties have subjected it or, failing any indication thereon, under the law of this State; or

o the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

o the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

o the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

§ The court finds that:

o the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or

o the award is in conflict with the public policy of this State.101

Similarly under Article 36 of the UNCITRAL Model Law, enforcement of the award may only be refused on the same grounds as outlined above, as well as if the requesting party furnishes proof that the award has not yet become binding or has been set aside or suspended by a court in the country in which it was made.102

Under the CAAs, judicial review is generally limited to ensuring the structural integrity of the arbitration.103 A number of procedural fairness requirements are included in the CAAs, such as the requirement for an impartial arbitrator and the equal hearing of both parties. The requirements allow the courts to ensure the integrity of the arbitration proceedings, but do not provide the ability for the court to review substantive issues unless the parties has agreed to do so in their arbitration agreement.104 This ensures the procedural fairness but provides for the arbitrators decision to be final and binding.

In a similar manner to the CAAs, a number of procedural fairness requirements are included in the draft Amendment Bill, including that arbitrator must be independent,

101 United Nations, 1994, UNCITRAL Model Law on International Commercial Arbitration, https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/06-54671_Ebook.pdf (Accessed 15 February 2017).

102 Ibid, Article 36(1)(v).103 It is noted that some CAAs do include for arbitration awards to be set aside and/or reviewed

beyond that provided for in the Model Bill, see for example section 34104 An ‘arbitration agreement’ is an ‘agreement by the parties to submit to arbitration all or

certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’ – section 7 of the Commercial Arbitration Act 2010 (NSW).

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https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/06-54671_Ebook.pdf

properly qualified and have no interest in the outcome of the dispute,105and through the protections afforded by Chapter 6, Part 6 of the NGL.

Some stakeholders have indicated that a right of review represents best practice and this could be achieved through the initial Rules. The draft Amendment Bill, unlike Part IIIA of the CCA, does not allow parties to a determination to apply to the Australian Competition Tribunal for review of the determination. Introducing such a review mechanism has the potential to add significant time and cost to the overall process to obtaining access to a pipeline service(s).

The determination will be made by an impartial arbitrator, and does not represent a regulatory decision. Thus, parties will not be able to access merits review as the determination is not a reviewable regulatory decision under Chapter 8, Part 5 of the NGL. Given the determination will not be made by a regulatory decision-maker but by an independent arbitrator, it is not appropriate to provide for merits review of the determination. To do so, would significantly discourage arbitrators from wishing to arbitrate disputes. Further, given the arbitrator is not a regulatory decision maker (such as the AER, NCC or a Minister), the determination will not subject be to judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth)).

Proposed approach:

1. Parties wishing to vary an arbitration agreement should be required under the Rules to apply to the AER in writing identifying the variation sought 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.

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.

4.4.1.7 Costs

There will be costs associated with arbitration, both in terms of the cost of the arbitrator (and any other support required) and the resources required to be devoted to the arbitration by each party. The credibility of the arbitration mechanism is dependent upon it providing a means of overcoming a dispute at a cost that is less that the cost associated with applying for coverage. It is recognised that even with the additional information contemplated by this paper, there will still be a disparity between the resources and knowledge held by the pipeline operator and the shipper. It is important the arbitration framework does not leave the shipper at a significant disadvantage during the arbitration process and costs are limited to the extent possible.

Parties should be mindful of the likely costs and risks involved with electing to go to arbitration to resolve a dispute. As recognised by the Major Energy Users Inc. 105 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017,

section 216K(3).

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(MEU) in its submission to the draft Amendment Bill, the costs incurred during the arbitration process, particularly by small shippers, is likely to be a disincentive to trigger an arbitration. Adequate safeguards need to be in place to ensure the arbitration process does not provide a platform for pipeline operators to exert their superior negotiating power resulting from the disparity in resources able to be dedicated to an arbitration compared to a small industrial gas user.

The draft Amendment Bill specifies that the costs of arbitration (including costs associated with the arbitration process and the cost of the arbitrator) will be shared equally between parties to the arbitration.106 Further, the draft Amendment Bill provides for the Rules to make provision for a different approach to allocating costs in specified circumstances.107 Beyond the costs associated with the arbitration process and arbitrators fees, the parties to an arbitration will bear their own costs. Parties will pay their own costs associated with participating in the arbitration process and the cost of the arbitrator and any procedural requirements (such as meeting room costs) will be shared equally.

The Rules should provide for the parties to agree otherwise to the splitting of costs, or for the arbitrator to apportion the arbitration costs (costs of the arbitrator and process) in specified circumstances. This would be consistent with the contractual dispute resolution clauses examined, which provide for the costs of the expert or mediator to be shared equally by the parties, unless the expert or mediator determines otherwise.

In determining if the specified circumstances warrant an alternate apportionment of costs, the arbitrator could consider:

§ The financial circumstances of the parties.

§ The value of services sought.

§ The negotiating and arbitration behaviour of both parties.

§ The likely flow on effects, if any, of the determination on other market participants, for example if there would be an increase competition in up upstream or downstream market.

§ If an access seeker elects not to be bound by the determination.108

To provide clarity, the Rules could also specify the costs associated with the arbitration process. Similar to the Port Terminal Access (Bulk Wheat) Code of Conduct,109 provision could be made specifying how the different costs associated

106 Ibid, section 216V(1).107 Ibid, section 216V(2).108 Clause 34 of the AustralAsia Railway (Third Party Access) Code provides for the costs of an

arbitration (including each party’s reasonable costs and expenses) to be borne by the parties in proportions decided by the arbitrator. However, 34(2) stipulates that if the access seeker terminates an arbitration or elects not to be bound by an award, the access seeker must bear the costs in their entirety.

109 See section 15(6) of the Port Terminal Access (Bulk Wheat) Code of Conduct, Schedule 1 of the Competition and Consumer (Industry Code-Port Terminal Access (Bulk Wheat) Regulation 2014.

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with arbitration may be apportioned, for example by stating that parties to the arbitration:

(a) will bear their own costs of attending the arbitration; and

(b) are equally liable for the following costs of arbitration unless they agree otherwise, or the arbitrator determines otherwise:

(i) the cost of the arbitrator;

(ii) the cost of any room hire;

(iii) the cost of any additional input (including expert reports) agreed by both parties to be necessary to the conduct of the arbitration; and

(c) are liable for any other costs determined by the arbitrator.

The arbitration mechanism should also provide a range of means to minimise costs, including through the flexibility afforded to the arbitrator in determining the appropriate procedures. For example, costs are likely to be reduced if the arbitrator only holds hearings when absolutely necessary and limits the amount of documentation able to be provided. Taking such an approach would significantly reduce the legal resourcing required to be devoted to arbitration.

Costs of expert advice

It is important that the arbitrator is able to access expert support in the event it is required. The draft Amendment Bill, through the application of Chapter 6, Part 6 of the NGL, provides the arbitrator to refer any matter to an independent expert and accept the expert's report as evidence.110 While this is appropriate, there will be costs associated with the provision of expert advice which ultimately the parties will be required to pay for.

To ensure parties are not left bearing the cost associated with expert advice that is not required to settle the dispute, the Rules could stipulate that the arbitrator only has the ability to seek expert assistance on the agreement of parties. While this would ensure that experts are only engaged when both parties agree it is necessary to do so, it also has the potential to be gamed by parties. To avoid this risk, the Rules should allow the arbitrator to determine the need for expert advice but require agreement from both parties on the cost limit for the advice.

This would ensure that parties are responsible for determining the maximum costs incurred as a result of the arbitrator seeking expert advice.

Arbitrator’s fees

Arbitrators would be expected to make available their fee structures and this could be published publicly or made available to parties upon request. The AER as the scheme ‘administrator’ could have the ability to fix or cap the fee to be paid to an arbitrator for the costs of, and the services provided by, the arbitrator. This would be similar to the power afforded under the Canada Transportation Act to the Canadian

110 National Gas Law, section 199(1)(e).

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Transport Agency which may fix the fee of the arbitrator of a FOA.111 While capping or fixing the arbitrators fees would provide parties with greater certainty of costs, if fees were set at a level that is not competitive it would provide a disincentive for arbitrators to undertake arbitration.

Proposed approach:

1. Provision be made in the Rules for parties to agree otherwise to the splitting of costs, or for the arbitrator to apportion the arbitration costs (costs of the arbitrator and process) in specified circumstances, taking into account matters such as: the financial circumstances of the parties; the value of services sought; the negotiating and arbitration behaviour of parties; the likely flow on effects, if any, of the determination on other market participants; 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 the expert advice in advance of obtaining expert advice.

3. The AER should have the ability to, but is not required to, fix or cap the fee to be paid to an arbitrator for the costs of, and the services provided by, the arbitrator.

4.4.2 Key design features

There are a number of key design issues associated with the arbitration framework that require careful consideration of the implementation approaches available. This section examines the options available for key arbitration design features, including the arbitration form, availability, procedural rules and timelines, the form of determination and principles used to guide the arbitrator. Unlike the design features outlined in section 4.7.1, this section provides a range of design options available. The approaches taken in relation to these design components vary in the arbitration options presented in section 4.5.

4.4.2.1 Form

Reflecting that arbitration is used in relation to diverse subject areas, arbitration mechanisms can vary significantly in form. Numerous forms of arbitration exist and could be utilised, including conventional arbitration, final-offer arbitration, combined arbitration and high-low arbitration.

Conventional Arbitration

Under Conventional Arbitration (CA), the arbitrator has unconstrained settlement choice - that is, the arbitrator is free to impose a determination of their choice, based on its best judgement of an appropriate settlement. This award may, but does not have to be, a compromise between the parties' final offers.

CA is widely used in commercial disputes as an alternative to litigation. CA is what is most commonly provided for in commercial contracts and in various statutory instruments such as the State and Territory legislation referred to above. The rules

111 Canada Transportation Act, section 166(1).

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utilised in the CA process will determine the procedural steps that are required to be taken.

CA has the same general advantages as outlined in section 4.1. The main criticism of CA mechanisms is that they tend to ‘chill’ pre-arbitration negotiations and increase the likelihood of arbitrator-determined settlements. Given arbitrators are inclined or perceived to compromise between the parties' final positions, disputants may be encouraged to exaggerate claims and avoid concessions. In gas pipeline disputes, rather than presenting their case on the basis of what represents an economic threshold for them (for example, the buyer would identify the maximum price it is willing to pay and the seller the minimum price it is willing to offer), parties may be incentivised to exaggerate their position in the interest of obtaining an outcome that provides an outcome that is weighted in their favour (i.e. greater revenue for the pipeline operator and decreased costs for the shipper). The arbitrator’s determination, which is likely to represent some form of compromise between two extremes, may not represent an equitable outcome.

CA, particularly in relation to commercial arbitrations that do not have legislated timeframes, can take a significant amount of time to complete and give rise to substantial costs. Parties spend vast resources and time preparing evidence for the arbitrator and responding to the arguments of the other party. In practice, these costs may not be less than pursuing the dispute through court. The arbitration may provide an unfair outcome in the event one party is not in a position to devote the same level of time and resources as the opposing party.

CA is also not always faster than litigation as the flexibility provided by procedures often allows parties to strategically delay and game the process. Parties may overwhelm the arbitrator by providing vast amounts of information that are not directly relevant to the matters in dispute. Not only does working through this documentation take time, it relies upon an arbitrator having the requisite skills and knowledge to determine what is relevant.

Final-offer arbitration

In final-offer arbitration (FOA), also known as baseball, last best offer, pendulum or straight-choice arbitration, the arbitrator is constrained to selecting one of the disputant’s final offers and cannot split the difference or select an alternative position. Thus, the arbitrator must make a straight choice between the parties' final positions and any other solution is automatically ruled out. This puts more of the decision-making power into the hands of the parties.

FOA is commonly used in the United States and Canada, particularly in relation to industrial disputes involving salary disputes between unions and employers. These disputes often involve public employees, such as police and firefighters, where strikes would likely cause economic loss and/or risk public health and safety. FOA has also been famously used to resolve disputes involving professional sports players, particularly baseball.

The International Centre for Dispute Resolution (ICDR) and the American Arbitration Association (AAA) have created a set of supplementary rules called Final Offer

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Arbitration Supplementary Rules, which can be used with the ICDR’s International Arbitration Rules or other rules of the AAA.112 The rules provide the parties with a better understanding of the process so that the parties can manage and assess the risks and rewards of adopting this arbitration process. Additionally, where the arbitral agreement specifies FOA, these rules provide a framework for the arbitration that does not exist elsewhere in the rules or legal precedent.

As outlined in section 4.3.2.2, the Canada Transportation Act contains several arbitration provisions designed to facilitate the resolution of rate and service disputes between carriers and shippers or transit authorities, including FOA.

On 25 February 2016, the Canadian Minister of Transport tabled in Parliament the Canada Transportation Act Review Report. The Review identifies priorities and potential actions in transportation that will support Canada’s long-term economic well-being. The Review provides useful insight on the application and experience of FOA in addressing transportation disputes. While the Review found that there were few concerns about rates charged by railways, many stakeholders were critical of the dispute resolution mechanisms within the Act, calling them ineffective, costly, time-consuming, and inaccessible, with the potential to create acrimony in a shipper-railway relationship.113

Many shippers expressed concern that the power of the railways makes them vulnerable to subtle forms of retribution, even if they get a favourable ruling in dispute resolution.114 The Review also recommended that shippers be given the option at the outset of the arbitration of having the arbitrator’s decision apply for up to three years.115 Further, the Review indicated that the dispute resolution process should be streamlined so that it is quicker, commercially grounded, more accessible for smaller shippers, and provides for timely payment of penalties and reimbursement of harmed parties.116 The Canadian Government is currently considering the Review Report.

FOA was designed to reduce the ‘chilling effect’ associated with CA. Since compromise is not possible under FOA, parties are expected to put forward more reasonable bargaining positions. Given the risk associated with FOA, each party should prefer to make concessions rather than face the possibility that the arbitrator chooses the other's offer. This should force the parties in dispute to put forward more realistic positions and thus move their positions closer together compared to conventional arbitration.

112 International Centre for Dispute Resolution (ICDR), Final Offer Arbitration Supplementary Rules, https://www.icdr.org/icdr/ShowProperty?nodeId=/UCM/ADRSTAGE2030257&revision=latestreleased (Accessed 15 February 2017).

113 Government of Canada, Canada Transportation Act (CTA) Review Report (2016), Volume 1, p. 137, http://www.tc.gc.ca/eng/ctareview2014/canada-transportation-act-review.html (accessed 6 March 2017 (Accessed 9 March 2017).

114 Ibid, p. 12.115 Ibid, p. 138.116 Ibid, p. 137.

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http://www.tc.gc.ca/eng/ctareview2014/canada-transportation-act-review.html

http://www.tc.gc.ca/eng/ctareview2014/canada-transportation-act-review.html

https://www.icdr.org/icdr/ShowProperty?nodeId=/UCM/ADRSTAGE2030257&revision=latestreleased

https://www.icdr.org/icdr/ShowProperty?nodeId=/UCM/ADRSTAGE2030257&revision=latestreleased

FOA can usually be completed in a shorter time frame. Parties have limited timeframes to prepare and submit their offers. Procedural rules are often flexible and allow for the arbitrator and parties to decide how to conduct the arbitration proceedings. Hearings are often not required, with information exchanged between parties and parties having the ability to ask written questions of another party which must be answered. For example, the Canada Transportation Act requires the parties to exchange the information that they intend to submit to the arbitrator in support of their final offers within fifteen days after the matter is referred for arbitration. Then within seven days after receipt of the information each party may direct interrogatories to the other, which shall be answered within fifteen days after their receipt.117

While FOA is designed to increase the uncertainty of arbitration and to induce more settlements, much of the theoretical work on FOA has cast doubt on that expectation.118 Some studies have found significantly higher dispute rates in FOA than CA,119 contradicting the expectation that FOA reduces arbitration’s chilling effect on bargaining. Further, by precluding the possibility of a compromise FOA creates 'winners' and 'losers' which may adversely affect ongoing commercial relationships.

Combined Arbitration

Combined arbitration, devised by Brams and Merrill (1986),120 combines elements of CA and FOA. Similar 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, CA rules are used.121

Theoretically, by combining the risks associated with CA and FOA combined arbitration should generate convergent final offers. However, in a controlled study of CA, FOA and combined arbitration, Dickinson (2004) found dispute rates to be highest in combined arbitration and lowest in CA. No examples were found of the use of combined arbitration in the desktop review conducted in the development of this paper. In practice, it appears that combined arbitration remains untested and thus the benefits and disadvantages remain unclear.

High-low arbitration

In high-low arbitration (HLA), or bounded or bracketed arbitration, the arbitration award will bind unless it exceeds an upper limit or is less that a lower limit, in which case the award would be at the relevant limit.

117 Canada Transportation Act, section 163(3) and (4).118 Dickinson, David 2004, A Comparison of Conventional, Final-Offer, and "Combined" Arbitration for Dispute

Resolution, ILR Review, 57 (2), p. 289.119 See generally above n 118 and Ashenfelter, 0., Currie, J., Farber, H., and M. Spiegel (1992) "An experimental

comparison of dispute rates in alternative arbitration systems", Econometrica, 60(6), pp. 1407-1433.120 Brams, S., and Merrill, I (1986) "Binding versus final-offer arbitration: a combination is best", Management

Science, 32(10), pp. 1346-1355.121 See above n 118.

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In HLA, the parties (not the arbitrator) set a maximum and minimum award threshold. High/low parameters are set forth in an independent contract that the parties make prior to the arbitration. By setting the limits in advance of the arbitration, parties essentially protect themselves against an outcome that is unfair or uneconomic. The arbitrators are not usually made aware of the parameters of the high/low, and make their awards based on the evidence. Any award which is not within the parameters of the high/low is then reduced or increased in line with the parameters.122

In the United States, HLA is popular in personal injury cases where the plaintiff has the legal right to go to court but wants to avoid the time and cost associated with doing so. HLA provides the plaintiff with certainty that even if the arbitrator awards nothing, that the award will be adjusted up to the agreed-upon minimum. Insurance companies are also attracted to having a cap on their liability exposure.

HLA is more suitable for liability cases where both parties are trying to avoid an extreme verdict. This form of arbitration is inappropriate for use in disputes in relation to access to pipeline services as it is unlikely that parties would agree to a range of acceptable prices between them in advance of arbitration. If they were able to do so they would be unlikely to need to go to arbitration because they would have come to an agreement on the maximum a shipper is willing to pay and the minimum a pipeline operator is willing to offer. Thus, this option is included for completeness only and is not examined further in the arbitration options presented at section 4.8.

4.4.2.2 Availability of arbitration

A key design component of the arbitration mechanism is identifying when it should be available to parties. Consideration of the availability of arbitration requires examination of the following:

§ the threshold for access to arbitration;

§ the scope of matters in dispute that should be eligible to be arbitrated; and

§ the appropriateness of potential exemptions from arbitration.

Threshold

Access to the arbitration mechanism is only intended to be used where commercial negotiations between the parties break down. The form and nature of requests for access from shippers, as well as how pipeline operators respond to this request, are commercial matters for the parties involved. While there is no intention to specify how commercial dealings must take place, a threshold may be required to ensure parties engage in good-faith commercial negotiations and only seek arbitration as a last resort to settle a dispute.

The Rules could provide for an explicit threshold or provide a discretionary threshold for the arbitrator to not proceed with arbitration in particular circumstances. These

122 See generally National Paralegal College, ‘High-low arbitration’, https://nationalparalegal.edu/public_documents/courseware_asp_files/ADR/Arbitration/HighLowArbit.asp (Accessed 18 February 2017).

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https://nationalparalegal.edu/public_documents/courseware_asp_files/ADR/Arbitration/HighLowArbit.asp

https://nationalparalegal.edu/public_documents/courseware_asp_files/ADR/Arbitration/HighLowArbit.asp

two categories of threshold as well as the options available for both are examined below.

Explicit thresholds

Negotiation timeframe threshold

A time frame threshold could be included in the Rules that requires parties to demonstrate that they have attempted to negotiate on the matter/s in dispute for a minimum specified period of time. The period of time specified could be a little as a month or as great as 12 months, or provide for a spectrum of different time frames depending upon the nature of the matter/s in dispute.

The benefits associated with a timeframe threshold is that it would provide certainty to parties as to their eligibility for arbitration. Specifying an arbitrary timeframe will provide limited flexibility for the time in which commercial negotiations take place, and would not reflect the fact that the nature and complexity of the matter/s in dispute may vary significantly. For example, establishing a new connection or negotiating for the expansion of a pipeline would be expected to take significantly longer to negotiate than negotiating access to a firm forward haul service on a pipeline with capacity available. While a spectrum of timeframes could be outlined in the Rules to reflect the different types of services and/or matters in dispute, the complexity of these types of disputes may still vary significantly as a result of the particular pipelines characteristics or the shippers specific requirements.

Financial threshold

A financial threshold could also be specified in the Rules, requiring the matter or matters in dispute to be worth at least a minimum amount of money (in a dollar figure or as a percentage of overall costs associated with the contract) before arbitration can be sought. The benefit of a financial threshold is that it would ensure that arbitration is only commenced if the costs and resources associated with the arbitration process is commensurate with the value of services/contracts being considered. This would be similar to section 249 of the NGL, which relates to the ability to seek merits review. The disadvantage associated with this approach is that the financial value associated with settling a dispute in arbitration will vary depending upon a range of factors, including the matters in dispute, the size and market position of the parties involved, the non-scheme pipeline in which access is sought, the geographical location and proximity to wholesale markets.

Discretionary threshold: Ability not to proceed with the arbitration

In accordance with section 216G of the draft Amendment Bill, a shipper seeking access to a pipeline service provided or to be provided by means of a non-scheme pipeline and the operator of the relevant non-scheme pipeline, must negotiate in good faith with each other about whether access can be granted and, if so, the terms and conditions for the provision of access.

Under section 216J(2), the AER need not refer an access dispute to arbitration if the AER considers that—

(a) the notification of the dispute was vexatious; or

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(b) the subject matter of the dispute is trivial, misconceived or lacking in substance; or

(c) the party who notified the access dispute did not negotiate in good faith; or

(d) a specified dispute termination circumstance has occurred; or

(e) there is some other good reason why the arbitration should not proceed.

The GMRG is of the view that the arbitrator, not the AER, should be responsible for determining whether the arbitration proceeds. This would be consistent with the administrative role intended for the AER and the approach suggested by numerous stakeholders in response to the draft Amendment Bill. This section proceeds on the basis that the arbitrator is responsible for determining whether the arbitration proceeds.

Providing the arbitrator with the power not to proceed with arbitration in the event it considers parties have not legitimately tried to resolve the dispute would help to ensure that parties do not misuse the arbitration process and only seek arbitration as a last resort in the event that they have exhausted commercial negotiations.

What represents a ‘specified dispute termination circumstance’ is examined in relation to the arbitrator’s power to terminate arbitration below (at section 4.4.3.1).

The arbitrator would have significant discretion to not proceed with the arbitration if the arbitrator considers ‘there is some other good reason why the arbitration should not proceed’. What represents a ‘good reason’ could be left entirely up to the arbitrator, or the arbitrator could be provided in the Rules with guidance on what may represent a good reason. Should guidance be provided in the Rules, there are a number of factors that the arbitrator could be required to consider in determining if to proceed with the arbitration, which are examined below.

Materiality of disputed matter/s

As an alternative to providing a financial threshold, the likely costs of arbitration and the value of services/contract being sought could be considered by the arbitrator as ‘some other good reason why the arbitration should not proceed’. This would allow the arbitrator to consider the materiality or significance of the dispute and whether arbitration is the most appropriate means to resolve the dispute.

Inability to provide the service sought

The Rules could require the arbitrator to consider if the pipeline operator has the ability to provide the services sought. There may be instances where the services sought by the shipper are unable to be provided because there is no capacity available, it is not technically feasible to provide the service and/or the service cannot be provided in a safe and reliable manner. In determining if the arbitration should proceed, the arbitrator should consider evidence provided by the pipeline operator that there is no capacity to provide the service requested. If required, the arbitrator should also be permitted to seek expert assistance to validate that the service cannot be provided.

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This discretionary threshold could not be used to justify not proceeding with an arbitration in the event the dispute is in relation to services that require further investment in the pipeline (as outlined below in relation to the types of disputes eligible for arbitration).

Genuine competition

The Rules could require the arbitrator to consider if there is evidence of genuine competition for the provision of service/s offered by the non-scheme pipeline in dispute. Such a requirement would be consistent with, and reflect, section 187 of the NGL which specifies that:

187—No access determination if dispute resolution body considers there is genuine competition

Despite anything to the contrary in this Chapter, the dispute resolution body may refuse to make an access determination that requires the service provider to provide a particular pipeline service to a prospective user or user if the dispute resolution body considers that the pipeline service the subject of the access dispute could be provided on a genuinely competitive basis by a person other than the service provider or an associate of the service provider.

In practice, it may be difficult for an arbitrator to make an assessment of the strength of competition, particularly if they do not have background in competition issues. This would likely narrow the field of arbitrators that could arbitrate disputes and/or require the arbitrator to rely on expert advice to determine if there is genuine competition and thus whether to proceed. The ability to form a view on existence of market power and existence of competition, whether from other pipelines or energy sources, would be difficult and would reflect a more regulatory approach consistent with the NCC’s responsibilities, rather than a commercial arbitration mechanism. Instead, the strength of competition, if any, could be considered by the arbitrator in making its determination.

The advantage of the above thresholds is that they provide parties with more certainty regarding their eligibility for arbitration. A disadvantage of an explicit threshold is that they can be arbitrary and not adequately take into account the different circumstances associated with disputes. Incorporating an explicit threshold would also predetermine how parties undertake commercial negotiation, which is not the intent of the arbitration mechanism.

Scope of disputes eligible for arbitration

A key design component of the arbitration mechanism is the scope of the disputes eligible to go to arbitration – that is, the type of services and the nature of the matters in dispute.

As outlined above there is no intention to interfere with existing contractual rights. Only disputes that arise when shippers seek a new service will be eligible to access arbitration. Parties with existing GTAs could not use arbitration as a means of renegotiating existing services, and the prices, terms and conditions associated with those services. Existing contracts ordinarily provide dispute resolution clauses that

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determine how disputes that arise under the contract can be resolved and afford shippers and pipeline operators some protection from court proceedings. The arbitration mechanism is not intended to displace or override the contractual mechanisms available. Disputes in relation to existing contracts should continue to be dealt with in accordance with the contractual requirements. Arbitration will not be available to parties seeking to reopen existing contractual terms and conditions which were the outcome of a commercial negotiation process. Allowing parties to seek arbitration in the event of reopening the terms and conditions of an existing GTA would undermine investment incentives and certainty.

Types of services

The Examination found that given many non-scheme pipelines have market power, and there are often no competitors to provide services, shippers seeking to add new services to an existing GTA also face a significant power imbalance during the negotiation process.

Accordingly, the arbitration regime will 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.

The types of services or ‘new services’ a shipper may seek access to can broadly be categorised as follows:

§ 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 (for example, in-pipe trading services, capacity trading services, redirection services, separate compression services).

§ Services that require the pipeline to be augmented , which may occur if:

o an extension is required;

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 these points need to be expanded); or

o an interconnection with another pipeline or pipelines is required.

Proposed approach: The GMRG proposes that shippers and pipeline operators should be able to access arbitration in the event of a dispute in relation to these types of services, with the exclusion of extensions (as proposed at section 4.3.2.2). This approach recognises that disputes can arise in relation to access to existing services on a pipeline or in relation to services that require augmentation. In the

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event there is competition for the services, including importantly in the investment sought, the arbitrator could consider this in making its determination.

Nature of matters

Similarly to the arbitration mechanism already available in relation to access disputes on scheme pipelines,123 the draft Amendment Bill does not prescribe specific matters in which the dispute must relate in order to access arbitration. Rather, the draft Amendment Bill contemplates that the matters in dispute eligible to access arbitration may be limited under the Rules. Section 216H(4) states that ‘A notification cannot be made under the section if the access dispute relates to a matter excluded from arbitration under this Chapter by the Rules’.

There are two main options as to the nature of matters in dispute that could be eligible for arbitration:

1. Disputes in relation to all aspects of access to the types of services outlined above, including the price and all terms and conditions associated with access.

2. Disputes in relation to the price associated with the types of services outlined above, as well as matters that are directly linked to price.

The first option would permit parties to access arbitration in the event of any dispute in relation to price and all terms and conditions associated with the provision of the service sought. Theoretically this would mean that parties could seek arbitration to resolve disputes on any of the terms and conditions associated with entering a GTA with the pipeline operator on a non-scheme pipeline. This would mean that the terms and conditions associated with access, including the content of contractual clauses on matters such as dispute resolution, curtailment arrangements, nomination cut-off times, imbalance and overrun limits and liabilities, would all be eligible for arbitration regardless of whether they have an impact on price.

These types of matters should be capable of being negotiated by parties and it is unlikely arbitration would be relied upon to resolve these disputes given the expense likely to be involved in doing so. Further, work conducted by the GMRG to standardise GTAs should minimise the risk that an arbitration would be called on that basis.

Similarly to option two, option one would still expressly exclude parties from being able to seek arbitration to vary the terms of an existing contract. Regardless of which option is selected, arbitration will only 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; or when an existing shipper is renegotiating a new contract to take effect on the expiry of their existing GTA.

The second option would limit the matters in dispute eligible to access arbitration to price and/or matters directly linked to price. Jemena indicated their support for this approach in their submission on the draft Amendment Bill.

123 National Gas Law, section 181.

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The advantage of this approach is that it would limit access to arbitration to instances where the imbalance in negotiating power is perceived to be resulting in higher prices than would be the case in a competitive market. It would focus arbitration on addressing the widespread belief, particularly in relation to the east coast gas market, that pipeline operators have market power and are exercising this power by monopoly pricing.

During the Examination many stakeholders, including some gas producers, retailers and users, indicated that some transmission pipelines on the east coast have market power and are using this power to engage in pricing that is ‘excessive’. In particular, many shippers raised concerns about the high price often associated with as available, interruptible, backhaul, bi-directional and other ancillary services (for example, compression), which are increasingly being used by market participants to provide more flexibility and allow more dynamic flows of gas to where it is valued most. While a range of issues and counter statements were provided by representatives of all sectors of the gas market, the objective of most stakeholders (other than pipeline operators), was prices for pipeline services that more closely aligned with the costs and risks associating with providing these services.

Limiting the nature of disputes to price and/or matters directly linked to price would limit the number of disputes eligible to access arbitration to those matters that have an impact on price, the matter most in contention. The price or tariff associated with services sought on a non-scheme pipeline is most likely to be in dispute. It would also mean that parties would need to continue to negotiate other terms and conditions that are not directly linked to price and relate to more procedural or operational issues.

Further, limiting the matters eligible for arbitration to price and/or matters directly linked to price would likely facilitate more tailored principles for the arbitrator to take into account in making a determination. This is because the principles would not need to provide the arbitrator with guidance in relation to the diverse range of matters that may be eligible for arbitration under the first approach.

Limiting the disputes eligible to access arbitration to disputes in relation to the price, and matters directly linked to price, would be inconsistent with the arbitration mechanism available in relation to access disputes on scheme pipelines.

Options:

1. Permit disputes in relation to all aspects of access to the types of services outlined above, including the price and all terms and conditions associated with access.

2. Limit the nature of disputes eligible for arbitration to disputes in relation to the price, as well as matters that are directly linked to price.

Potential exemptions

The draft Amendment Bill provides for the arbitration to apply to, and in relation to, a transmission pipeline that is not a scheme pipeline and a distribution pipeline that is

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not a scheme pipeline.124 This potentially means that arbitration could be sought to resolve access disputes in relation to all gas pipelines that are not subject to light or full regulation. Box 4.9 provides the relevant provision.


Section 216C: Application of Chapter (1) Subject to subsection (2), this Chapter applies to and in relation to—

(a) a transmission pipeline that is not a scheme pipeline; and

(b) a distribution pipeline that is not a scheme pipeline.

(2) This Chapter does not apply to or in relation to—

(a) a pipeline, or part of a pipeline, excluded from the operation of this Chapter by the Rules; or

(b) a pipeline service (including in relation to a specific pipeline, or part of a specific pipeline) excluded from the operation of this Chapter by the Rules.

As contemplated by the draft Amendment Bill, there may be circumstances in which it is not appropriate for arbitration to be available for a particular pipeline or part of a pipeline, class or category of pipelines, or a pipeline service. Section 216C(2) recognises that the Rules may provide for exemptions from the arbitration framework.

The AER would appear to be the most logical candidate for overseeing any exemptions. Parties would be required to seek an exemption in accordance with the Rules, which would likely stipulate that parties would need to apply to the AER indicating the exemption sought and provide adequate evidence to prove that the exemption should apply. The GMRG is interested in hearing stakeholders’ views on the exemption mechanism, including the types of exemptions examined below and the way in which exemptions are sought under the Rules.

Three types of exemptions were considered in relation to particular classes of pipelines: non-scheme distribution pipelines, single shipper pipelines and pipelines subject to a 15-year no-coverage determination.

Non-scheme distribution pipelines

The majority of distribution pipelines, that service major cities, are scheme (covered) pipelines and the arbitration framework would not be available. Instead, shippers may access the dispute resolution provisions already available for access to scheme pipelines under the NGL.

There are a number of smaller distribution pipelines that are not subject to regulation and would fall within the definition of non-scheme pipelines. Examples of unregulated distribution pipelines include the Wagga Wagga distribution pipeline,

124 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216C(1).

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Tas Gas Networks, Mildura Distribution System, Alice Springs Distribution Network, Dalby Distribution System and Roma Distribution System.

While smaller regional distribution pipelines are likely to have significant market power, they also have significantly less shippers or prospective shippers seeking access and less prospect of competition given limited gas consumption. As a result of limited consumption, one retailer often ships all of the gas transported to a regional area. Regional areas serviced by small distribution pipelines commonly have limited demand and are often not in a position to use their market power because they may only be negotiating with one shipper. In this scenario, both the distribution pipeline and the shipper has market power and the commercial negotiation should reflect this.

Concerns raised by stakeholders during the Examination about market power being exercised to the detriment of consumers and efficient market outcomes, were raised solely in relation to transmission pipelines. This is likely to reflect that the majority of distribution pipelines are regulated.

Given the limited shippers and customers using the smaller distribution pipelines defined as non-scheme pipelines, the costs and resources associated with the arbitration process would be unlikely to be commensurate with the value of services/contracts being considered. Thus, the costs associated with arbitration would likely outweigh the benefits. As highlighted by the MEU in its submission to the draft Amendment Bill, the cost associated with small users on distribution pipelines getting an equitable outcome during an arbitration process would likely exceed any benefit they might individually gain via reduced pipeline tariffs.

Options:

1. Provide non-scheme distribution pipelines with an exemption under the Rules; and/ or

2. Under section 216J allow for the AER (or arbitrator if the final Amendment Bill is amended in response to stakeholder concerns) to consider the likely costs of arbitration and the value of services/contract being sought in determining if an arbitration should proceed. This would allow the arbitrator to find that arbitration is not commensurate with the value of services being sought and the fact the party would be financially disadvantaged to represent ‘some other good reason why the arbitration should not proceed’.

Single-shipper pipelines

There are a number of pipelines, transmission and distribution, that only service one shipper. There are a couple of different examples of single shipper pipelines. On the one hand, there are pipelines that have been built exclusively to service the needs of one customer. These pipelines are often built to reflect the capacity required by the gas user to obtain the gas required to run their business. Given the pipelines have been built solely to service one user there is often not capacity available for sale to third parties. Further some single-shipper pipelines are geographically remote and for this reason access is unlikely to be sought even if capacity were available.

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Single shipper pipelines may include pipelines such as the Fortescue River Gas Pipeline and the Reedy Creek to Wallumbilla Pipeline. Both these pipelines were recently built in response to competitive processes and service one user. The competition to build the pipeline placed a constraint on the behaviour of the pipeline operator, and the outcome of negotiations to construct the pipeline should reflect competitive outcomes. In this situation, similar to distribution pipelines serving one shipper, there should be greater balance in the parties negotiating power. Given the relative power of both parties, arbitration is unlikely.

On the other hand, there are some pipelines in which pipeline capacity is only contracted to one shipper, often a retailer, but the pipeline was not specifically built to service the need of one shipper. While the pipeline may only have one shipper, there may be excess/spare capacity available to third parties. In the event the capacity of the pipeline is not fully contracted, it may be appropriate for arbitration to be available. This would allow the existing shipper 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, it would permit new shippers to seek arbitration in the event of an access dispute.

Options:

1. Do not provide single-shipper non-scheme pipelines with an exemption under the Rules.

2. Provide for exemptions under the Rules for both forms of single shipper non-scheme pipelines – pipelines that have a single shipper, regardless of whether there is capacity available on the pipeline and/or if it was purposely built for use by a single shipper – provided this is not expected to change in the foreseeable future.

3. Provide an exemption only for non-scheme pipelines that do not have services available for sale to third parties. However, if pipeline services do become available for third parties the exemption should expire.

4. Provide an exemption for single shipper pipelines and pipelines that do not have services available to third parties.

Greenfields pipelines

A pipeline operator who is proposing, or has commenced (but not yet commissioned), a greenfields pipeline project may apply to the NCC to be granted a 15 year no-coverage determination exempting the pipeline from being a covered pipeline (that is, from being subject to light or full regulation). No-coverage determinations are intended to provide regulatory certainty for investors in new pipeline projects and to encourage efficient investment in new pipeline infrastructure.

The Examination did not propose any change to the existing 15-year no-coverage period. Retaining the 15 year no-coverage option is important to counter the effect that regulation could otherwise have on investment in new greenfields pipelines. However, the Examination also observed that negotiations involving parties to

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foundation contracts relating to services not covered in those contracts, or involving a new party, should be subject to the arbitration framework.125

Under the draft Amendment Bill pipelines subject to a 15-year no-coverage determination fall within the definition of a ‘non-scheme pipeline’; that is, they are not a ‘scheme pipeline’.

GLNG’s submission to the draft Amendment Bill, recommended that no-coverage and/or single use pipeline facilities be exempt on the basis of the dedicated nature of the infrastructure and the existing 15-year no-coverage determinations. GLNG contend that an arbitration mechanism that ‘does not exempt these categories of pipelines would materially deter efficient investment in dedicated pipelines and associated infrastructure and disrupt substantial investments that have already been made in pipelines and projects that depend on them’.

DBP Transmission also contended that ‘it is fundamentally important that the protection of the no coverage determination remain’, as the ability for third parties to obtain arbitrated terms of access would undermine the incentive for investment in new greenfields pipelines.

A number of pipelines subject to a no-coverage determination are fully contracted and/or owned and operated by the same or related companies, including the GLNG pipeline and APLNG pipeline. In this situation, arbitration is highly unlikely to be relied upon. Further, most pipelines subject to a no-coverage determination are single-shipper pipelines and/or do not have services available for sale to third parties, and may be able to obtain an exemption on that basis.

Rather than providing an exemption for pipelines subject to a no-coverage determination, there is the potential for the pricing principles, which the arbitrator will need to take into account in making a determination under the Rules, to use the prices struck in the foundation contracts as the basis for assessing the reasonableness of the offer. If implemented, this pricing principles option would likely alleviate some of the concern with having an arbitration during a no-coverage period. Further information on this pricing principles option is provided at section 5.1.1.

Options:

1. Provide all pipelines subject to a 15-year no coverage determination with an exemption under the Rules; or

2. Do not provide for an exemption for pipelines subject to a 15-year no-coverage determination.

4.4.2.3 Rules of procedure

The rules of procedure refers to how the arbitration process is practically run, including in relation to oral hearings, the submission and disclosure of information


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and the level of support available to the arbitrator (from independent experts and/or regulatory bodies).

The draft Amendment Bill applies Chapter 6, Part 6 of the NGL with some exclusions. This provides for the hearing procedures associated with dispute resolution for scheme pipelines conducted by the AER. The relevant provision in the draft Amendment Bill is provided at Box 4.11.


Section 216S – Hearing ProceduresChapter 6 Part 6 applies to an arbitration under this Chapter—

(a) as if—

(i) a reference in that Part to a dispute hearing were a reference to a hearing conducted by an arbitrator for the purposes of making an access determination under this Chapter; and

(ii) a reference in that Part to a party or parties were a reference to a party or the parties to an arbitration under this Chapter; and

(iii) a reference in that Part to the dispute resolution body were a reference to an arbitrator under this Chapter; and

(iv) a reference in that Part to an access dispute were a reference to an access dispute under this Chapter; and

(b) subject to the exclusion of sections 206 and 207,126 and subject to any other exclusion prescribed by the Regulations; and

(c) subject to any modifications prescribed by the Regulations; and

(d) with such other necessary alterations and modifications.

Chapter 6, Part 6 of the NGL provides for the following procedures:

§ A dispute hearing is to be held in private, unless parties agree otherwise and the dispute resolution body may give written directions as to the persons who may be present at the dispute hearing if conducted in private.127

§ At a dispute hearing a party has the right to representation.128

§ The powers of the dispute resolution body in a hearing, including the ability to refer any matter to an independent expert and accept the experts report as evidence.129

§ The dispute resolution body may order a person not to divulge or communicate to anyone else specified information that was given to the person in the course of an access dispute unless the person has the dispute resolution body's permission.130

126 Note that section 206 and 207 of the National Gas Law relates to the costs associated with dispute resolution, which is dealt with by section 216V of the Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017.

127 National Gas Law, section 196.128 Ibid, section 197.129 Ibid, section 199.130 Ibid, section 200.

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§ The dispute resolution body may take evidence on oath or affirmation and summon a person to appear before the dispute resolution body.131

§ A person summoned to appear as a witness must not without reasonable excuse fail to appear.132

§ A person appearing as a witness must not, without reasonable excuse fail to be sworn or make an affirmation, fail to answer a question or produce a document required by a summons.133

§ Parties must not intimidate one another during the dispute resolution process.134

§ A party may request a dispute resolution body to treat material as confidential.135

Additionally, section 198 of the NGL, outlines the procedure of the dispute resolution body, including that it is not bound by technicalities, legal forms or rules of evidence and must act as speedily as a proper consideration of the dispute allows. The dispute resolution body may determine the time periods reasonably necessary for the fair and adequate presentation of the respective cases of the parties in the dispute hearing, require evidence to be provided in writing and decide on the matters it will hear oral evidence or argument.136 The dispute resolution body also has the power to determine if a hearing is conducted by telephone, closed circuit television or any of means of communication.137

Importantly, section 198(5) provides for the Rules to make further provision about the procedure for the conduct of dispute hearings.

Procedural flexibility

As highlighted above, the arbitrator will have significant flexibility to determine how the arbitration should be run. While the arbitrator will be required to comply with Chapter 6, Part 6 of the NGL, and the timeframe for providing the determination outlined in the Rules, the arbitrator would have the ability, in consultation with parties, to run the process in a manner appropriate for the parties and matters before it.

This approach is consistent with the flexibility afforded to arbitrators in the Commercial Arbitration Acts. For example, Commercial Arbitration Act 2010 (NSW) provides for the parties to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings and failing agreement the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate.138 The Act also provides for the arbitral tribunal to decide whether to hold oral hearings for the

131 Ibid, section 201.132 Ibid, section 202.133 Ibid, section 203.134 Ibid, section 204.135 Ibid, section 205.136 Ibid, section 198(2) and (3).137 Ibid, section 198(4).138 Commercial Arbitration Act 2010 (NSW), section 19(1) and (2).

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presentation of evidence or for oral argument, unless contrary to the wishes of the parties or requested by a party.139

The contractual dispute resolution clauses examined also generally provide for procedural flexibility regarding how the dispute resolution is run. The standard contract of Tas Gas Networks provides for the parties, in consultation with the mediator, to determine a location, timetable and procedure for the mediation or, if the parties cannot agree, these matters will be determined by the mediator. In relation to an arbitration, Tas Gas Network stipulates that the venue of the arbitration will be Hobart and that the arbitrator will not appoint any expert except with the written consent of both parties. DBP Transmission, in its standard contracts for the DBNGP, provide for the independent expert to be responsible for determining the procedures to be followed in resolving the dispute (including whether or not any hearing will take place) and the parties must co-operate promptly with those procedures.

Further, this form of procedural flexibility is commonly provided in relation to all forms of arbitration examined. For example, the FOA provided by the Canada Transportation Act provides for the arbitrator and parties to decide how to conduct the arbitration proceedings. If the parties cannot agree, the CTA will provide the rules of procedure.140 Further, the arbitrator is required to conduct the arbitration proceedings as expeditiously as possible and, in the manner the arbitrator considers appropriate having regard to the circumstances of the matter.141

The New Zealand National Code of Practice for Utility Operators’ Access to Transport Corridors requires the arbitrator to ‘adopt a procedure which, in the arbitrator’s opinion, is the most simple and expeditious procedure practicable in the circumstances’.142 Similarly to the Commercial Arbitration Act 2010 (NSW), under the Code the arbitrator may determine the Dispute without a hearing unless either Party gives notice requiring one, in which case the arbitrator must treat that as a material consideration in assessing costs.143

Nothing in the draft Amendment Bill requires the arbitrator to hold a dispute hearing. The arbitrator would have the discretion to determine, in consultation with parties, whether to hold a hearing and if so, how the hearing should be held. The arbitrator may decide to make a determination based on written material alone and prescribe the volume, form and cut-off date for the provision of information. This would prevent parties from strategically overburdening the arbitrator with information that is not necessarily relevant to the matters in dispute. If an oral hearing is held the arbitrator should ensure it is concentrated on the main points of contention.

An arbitrator may also limit the number and length of written submissions and documents. For example, the arbitrator could focus the parties on the key issues by

139 Ibid, section 24(1) and (2).140 Canada Transportation Act, section 163(1).141 Ibid, section 163(2).142 National Code of Practice for Utility Operators’ Access to Transport Corridors (September

2016), New Zealand, clause 7.6 (2)(c), page 91.143 Ibid, clause 7.8(2)(d).

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providing a list of particular questions for the parties to address. To encourage concise arguments and the provision of essential documentation that are directly relevant to the matters in dispute, a cut-off date should be set in advance of any hearing and after which no documents can be admitted by parties to the arbitrator unless there are compelling reasons to do so.

In determining the appropriate rules of procedure, in addition to the requirements of the draft Amendment Bill, parties and the arbitrator could seek guidance from the AER guide to be developed (as outlined at section 4.4.1.4), the relevant CAA and the arbitration rules provided by dispute resolution institutions such as ACICA.

In deciding upon the appropriate procedures, the arbitrator could consider the following questions:

§ Do the matters in dispute require oral hearing/s?

§ If a hearing or hearings are required, how can they be structured so that adequate time is provided for each party to present their case?

§ Can a hearing be effectively conducted electronically?

§ What are appropriate time limits and processes for each party to put forward their evidence and arguments on the disputed facts?

§ Should parties submissions be limited in number and/or length?

§ Should expert evidence be restricted to written evidence? Would written expert evidence serve to accelerate or burden the evidence-taking process compared to simple oral testimony?

Is less flexibility required to promote procedural fairness and timeliness?

To provide a legitimate threat of interference, the procedural rules must ensure there is adequate opportunity for both parties to properly present their case. The parties to the arbitration process, similar to commercial negotiations, will have an imbalance in power. This imbalance is likely to result from the difference in financial resources and expertise able to be devoted to the arbitration process by each party. It is important that the outcome of arbitration is not determined by the resources the parties are in a position to devote to the arbitration process. Parties in a financial position to do so should not be permitted to obtain excessive legal representation and/or expert advice, or overwhelm the arbitrator with vast amounts of information that are not required to reach a determination on the matter/s in dispute. If the arbitrator is provided the flexibility to determine the procedures, the nature of the dispute and the resources available to parties will need to be considered during the planning process.

The level of flexibility discussed above may risk the three-month time period not being met and extensions being required. This could be managed by requiring the arbitrator make clear to the parties at the commencement of the arbitration the rules of procedure to be used, including the timing and cut-off dates of steps such as the provision of information. The risk of a protracted arbitration may also be addressed by the flexibility afforded to the arbitrator regarding whether to hold hearings and to direct the form and content of information submitted.

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Options:

1. Provide the arbitrator with the flexibility to determine the rules of procedure rules in accordance with Chapter 6 Part 6 and require nothing further in the Rules; or

2. Alternatively, the Rules could require:

o the arbitrator to hold at least one hearing (whether in person, via teleconference or videoconference); or

o the arbitrator to make a determination based on written documentation alone, unless both parties agree that an oral hearing is necessary; and/or

o the arbitrator to, at the commencement of the arbitration, set out the documentation limitations, including the cut-off date for submission and the number and length of submissions; and/or

o the parties to only submit documentation to the arbitrator that is directly relevant to the matters in dispute.

Support available to the arbitrator

The identification of reasonable access terms and conditions will be resource intensive, both for the arbitrator and the two parties. The ability of the arbitrator, even one highly qualified, to determine complex access disputes may be limited unless they are provided with the ability to obtain necessary expert support in the event it is required. Chapter 6, Part 6 provides for the dispute resolution body (the arbitrator) to refer any matter to an independent expert and accept the expert's report as evidence.144 As outlined in section 4.4.1.7, the GMRG proposes that the Rules specify that while the arbitrator may obtain expert advice, it must seek the agreement from the parties involved on the cost limit for the advice.

Further, the Rules could provide for the AER to provide administrative or technical assistance if requested by the arbitrator. This type of assistance is made available by the Canadian Transportation Agency if requested by the arbitrator responsible for a FOA.145 The ability to seek this assistance recognises that the Agency has administrative oversight of the arbitration mechanism as well as relevant experience and expertise in the transportation sector. Similarly, under the Railways Access Code 2000 (WA), the arbitrator may refer a question that arises in the course of the hearing of a dispute to the regulator and request his or her opinion, advice or comments on the question.146 In determining the dispute, the arbitrator may then give such weight to any opinion, advice or comments given by the regulator as he or she thinks fit.147

Options:

1. Do not provide for any additional provisions regarding support in the Rules (beyond requiring the agreement of parties before an arbitrator seeks expert assistance as outlined in section 4.4.1.7).

144 National Gas Law, section 199(1)(e).145 Canada Transportation Act, section 162(2).146 Railways (Access) Code 2000 (WA), clause 30(1).147 Ibid, reg 30(2).

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2. On the request of the arbitrator, the AER may provide administrative or technical assistance, including the provision of advice or comments in relation to the application of the pricing principles or other principles outlined in the Rules.

Information gathering powers

The ability of the arbitrator to make a robust and considered determination will be dependent upon being provided with adequate information. The information required to be made available in accordance with the information disclosure requirements outlined above will provide an important input to the arbitration process. Further, parties would be expected to provide relevant information to the arbitrator to aid its consideration of the matters before it.

Under the draft Amendment Bill, the arbitrator will have the ability to seek expert advice but does not have a specific information gathering power. Some stakeholders have indicated that it is important that the arbitrator has adequate information gathering powers to facilitate its decision-making. Additional power could be provided to the arbitrator in the Rules to ensure it has the necessary power to obtain the information required. This power could take a similar form to section 27 of the Maritime Services (Access) Act 2000 (SA), as provided in Box 4.12.

Box 4.12: Maritime Services (Access) Act 2000 (SA)

Section 27—Power to obtain information and documents(1) If an arbitrator has reason to believe that a person is in a position to give information

or to produce documents, that may be relevant to the dispute, the arbitrator may, by written notice—

(a) require the person within a period stated in the notice—

(i) to give the arbitrator a written statement of specified information; or

(ii) to produce to the arbitrator specified documents or copies of specified documents; or

(b) require the person to appear before the arbitrator at a specified time and place to give evidence.

(2) A written statement must, if the arbitrator so requires, be verified by statutory declaration of the person providing the information or, if the person is a body corporate, an appropriate officer of the body corporate.

(3) If documents are produced to an arbitrator, the arbitrator may—

(a) take possession of, make copies of, and take extracts from, the documents; and

(b) keep the documents for as long as is necessary for the purposes of the arbitration.

(4) A person must—

(a) comply with a requirement of the arbitrator under subsection (1) or (2); and

(b) if the person is required to appear as a witness before the arbitrator—comply with further requirements to make an oath or affirmation, or to answer questions.

Maximum penalty: $20 000.

(5) However, a person need not give information or produce a document if—

(a) the information or the contents of the document are the subject of legal professional privilege, or would tend to incriminate the person of an offence; and

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(b) the person objects to giving the information or producing the document by giving written notice of the ground of the objection to the arbitrator or, if the person is appearing as a witness before the arbitrator, by an oral statement of the ground of objection.

The need for arbitrator to have an information gathering power is dependent upon the level of information required to be disclosed by pipeline operators and the principles (pricing and any other principles) that the arbitrator is required to have regard to in making a determination. Thus, the need for an information gathering power is examined further in Chapter 6, which discusses the GMRG’s preliminary views on the options for information disclosure, arbitration mechanism and arbitration principles.

Options:

1. Do not provide the arbitrator with an information gathering power under the Rules.

2. Provide an information gathering power to the arbitrator, which could be similar to that in the Maritime Services (Access) Act 2000 (SA) or be tailored to allow the arbitrator to obtain the information required to apply the pricing principles and other principles outlined in the Rules

4.4.2.4 Determination (or award)

Assuming the arbitration is not terminated, section 216L of the draft Amendment Bill requires the arbitrator to make a determination on access and the determination ‘may deal with any matter relating to access by the shipper to the pipeline services specified by the Rules for this subsection’ (and must not be inconsistent with, or go beyond the matters specified in the Rules).148 Further, section 216L(3) states that:

The Rules may also, in connection with the making of an access determination, contain provisions for or with respect to such things as—

(a) the form of any determination; and

(b) the content of any determination, including as to the giving of reasons; and

(c) the time within which a determination must be made; and

(d) the process for making a determination; and

(e) when a determination takes effect; and

(f) the giving of notice of the making of a determination.

The following sections examine the matters outlined from (a) to (f) and, where appropriate identifies the implementation options available.

148 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216L(1) and (2).

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Form and process

Regardless of the form of arbitration implemented, the determination should be required to be made in writing, signed by the arbitrator and contain the date on which the determination was made. The arbitrator should be required to communicate copies of the signed determination to the parties and AER without delay. The determination should be required to be communicated electronically (via email) and by post.

Requiring the determination to be in writing, dated and signed is consistent with the CAAs149 and the ACICA Arbitration Rules.150 Beyond these high-level requirements generally in commercial arbitration the arbitrator has the flexibility to determine the exact form of the determination, including how it is structured and its content.

The arbitrator could be required to provide a draft or interim determination. A draft determination generally proposes terms that would apply and provides parties with an opportunity to comment on them before they are implemented. Under Part IIIA of the CCA, before making a determination, the ACCC must provide a written draft determination to the parties.151 Similarly, DBP Transmission’s standard contracts for the DBNGP require the independent expert to, prior to handing down the determination, issue the determination in draft form to the parties.152

An interim determination would put terms and conditions of access in place for the short term while a final determination is made. Under Chapter 6, Part 6 of the NGL as applied by the draft Amendment Bill, the arbitrator may provide an interim determination, but is not required to do so.

The advantage of requiring a draft determination is that it allows parties to formally respond to the draft determination, including the evidence and reasoning relied upon. The arbitrator must then consider the written submissions made by parties before settling and handing down the final determination. The draft determination allows to arbitrator to test its thinking and ensure that they have not misunderstood or not taken into account relevant information. This process can help minimise the risk of arbitrator error and prepare parties for the likely determination outcome.

The biggest disadvantage of requiring an arbitrator to provide a draft determination is the time associated with doing so. A two-step determination process would likely significantly extend the time taken for the arbitration process. It is unlikely an interim determination, as well as providing adequate time for parties to respond to the interim determination, and a final determination could be effectively completed within the three months envisioned by the arbitration mechanism. Further, an interim determination is entirely inappropriate if FOA is implemented. FOA requires the arbitrator to choose one offer and it being binding. If the arbitrator provided an interim determination indicating which offer it is thinking of choosing it would not only

149 See for example Commercial Arbitration Act 2010 (NSW), section 31.150 ACICA Arbitration Rules (1 January 2016), rule 38.2-5.151 Competition and Consumer Act 2010 (Cth), section 44V(4).152 DBNGP (WA) Transmission Pty Ltd, Standard Shipper Contract – Full Haul T1 (DBNGP),

February 2015, clause 24.10(e)(iii).

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incite further submissions and argument, it would encourage the party whose offer did not get chosen to terminate the arbitration by any means possible before the final determination is made.

Proposed approach: The arbitrator shall make their determination in writing, signed and dated, and communicate it to the parties and the AER.

Options:

1. The arbitrator may provide an interim determination in accordance with the NGL. In determining whether to provide an interim determination, the arbitrator should be mindful of the timeframe required to make the determination; or

2. Require the arbitrator to provide parties with a draft determination under the Rules.

Content

The content of the determination, including the matters dealt with and if reasons are required to be provided, will likely vary depending upon the form of arbitration implemented.

Conventional arbitration

As outlined above, the determination may deal with any matter outlined in the Rules. Appendix C.1 of the Intergovernmental Agreement on Competition and Productivity – Enhancing reforms (COAG, 2016) states that: ‘a dispute resolution body should be able to deal with anything related to third party access, including matters that were not the basis for notification of the dispute’.153 By way of example the determination may: require the provider to provide access to the service by the third party; require the third party to accept, and pay for, access to the service; specify the terms and conditions of the third party’s access to the service; require the provider to extend the facility, including require the provider to expand the capacity of the facility and/or require the provider to expand the geographical reach of the facility; require the provider to permit interconnection to the facility by the third party; or specify the extent to which the determination overrides an earlier determination relating to access to the service by the third party.154 Similarly to the Intergovernmental Agreement, access determinations made by the AER in relation to access disputes on covered pipelines ‘may deal with any matter relating to the provision of a pipeline service to a prospective user or user’.155

Allowing an arbitrator to deal with anything related to third party access, including matters that were not the basis for notification of the dispute affords the arbitrator with extremely broad discretion. This level of discretion is not appropriate for a commercial arbitration process available to unregulated pipelines. The matters dealt with in a determination should be limited to the matter/s in dispute, and any other matters conditional upon the matters in dispute. In dealing with the matter/s in 153 COAG, 2009, Intergovernmental Agreement on Competition and Productivity – Enhancing

reforms, Appendix C.1, clause 7(j).154 Ibid.155 National Gas Law, section 193.

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dispute an access determination may require the pipeline operator to provide a pipeline service to the shipper at a specified tariff, rate or charge; and on specified terms and conditions. While the determination would only be required to deal with matters in dispute, the arbitrator would be permitted to take into consideration the matters agreed by parties and required to take into account the pricing or other principle specified in the Rules.156

In the event of commercial arbitration, the arbitrator is ordinarily required to state the reasons associated the determination unless the parties have agreed that no reasons should be given.157 No further direction or requirements are generally provided as to the specific content of the determination, beyond the fact it must be signed and dated (and sometimes the arbitrator is required to identify the place in which the determination was made). This provides the arbitrator with the flexibility to determine the appropriate content of the determination.

Conventional arbitration of access disputes relating to regulated infrastructure, conducted by regulators, ordinarily require an access determination to provide reasons for the determination. Section 184 of the NGL requires an access determination made by the AER to include a statement of reasons for making the determination.158

Given the wide discretion afforded to the arbitrator, whether a regulator or independent arbitrator, in CA to determine the appropriate resolution, the arbitrator should be required to provide the reasons that form the basis of the determination. Without the provision of reasons, parties would be left to speculate how the arbitrator reached the determined outcome rather than understand the basis of the decision. In the absence of this decision-making insight, it would be difficult for parties to learn from the outcome of the determination and make necessary internal changes to processes or commercial strategies to help ensure they avoid arbitration in the future.

In the event CA is implemented, stipulating the required content of the determination may facilitate timeliness by ensuring that the arbitrator focuses his/her time appropriately. To encourage timely and concise determinations, the content of determinations could be limited to outlining the following:

(a) the date the determination is made;

(b) the parties to the determination;

(c) the matters agreed by parties;

(d) the matters in dispute and how they are dealt with by the determination through the provision of a statement of reasons, which includes how the arbitrator took into account the pricing and other principles outlined in the Rules; and

(e) the arbitrators signature.

156 In accordance with Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216M.

157 See Commercial Arbitration Act 2010 (NSW) section 31(3) and ACICA Arbitration Rules (1 January 2016), clause 38.3.

158 National Gas Law, section 184(3)(b).

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Further, to ensure an arbitration can be completed within three months there may be benefit in developing and providing a standard form determination on the AER website. Provision of a standard template may help expedite the determination writing process.

FOA

In the event FOA is implemented, similarly to the Canada Transportation Act, the content and matters dealt with the determination may be limited to identifying which final offer the arbitrator has chosen.159 The arbitrator does not necessarily need to provide reasons for his/her determination. In accordance with section 165(4) of the Canada Transportation Act, the decision of the arbitrator does not include reasons. Instead, on the request of the parties within 30 days of the arbitrator's decision, or seven days under the summary process (>$750,000), the arbitrator shall provide written reasons.160

Under a FOA mechanism similar to the Canadian Transportation example, the determination content could be limited to:

(a) the date the determination is made;

(b) the parties to the determination;

(c) the final offer chosen; and

(d) the arbitrators signature.

Under the Rules, parties could be provided with the ability to request reasons for the determination within a particular time period. The very nature of FOA, requires the matters to be dealt with by the determination to be limited to selecting one final offer.

Alternatively, similarly to a CA mechanism, the arbitrator could be required to state the reasons the particular final offer was chosen and how the arbitrator took into account the pricing and other principles specified in the Rules. This would allow parties to understand why the arbitrator chose one final offer over the other final offer. In the absence of reasons, it would be difficult for parties to understand why their offer was or was not successful and use this insight to influence future commercial negotiations to ensure they avoid arbitration.

Options:

1. The arbitrator has the discretion to determine the content of the determination but must provide reasons for the determination; or

2. Specify in the Rules the minimum content the determination must address, including outlining the matters agreed by parties, the matters in dispute and the reasons for the determined resolution; or

3. Do not require the arbitrator to provide reasons for the determination but allow parties to request reasons within a specified time period. This is only likely to be appropriate in the event FOA is implemented.

159 Canada Transportation Act, section 165(1).160 Ibid, section 165(5).

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Timeframe for determination

A key objective of the arbitration mechanism is to ensure it can be completed in a timely fashion. Commercial arbitration may, but does not necessarily require that the determination be made within a specific time period. For example, unless specified elsewhere in the standard contract relating to the DBNGP, the independent expert is required to make its determination ‘within a reasonable period of his or her appointment’.161 Reflecting that the CAAs may apply to a huge range of disputes in different sectors, they also do not specify a timeframe in which an arbitration determination must be made.

Various state-based infrastructure access regimes provided for by legislation often stipulate that the arbitration of disputes must occur in accordance with the relevant CAA.162 The Maritime Service (Access) Act 2000 (SA), which provides a framework for the negotiation of access to regulated maritime (port) services provides for commercial arbitration in accordance with Commercial Arbitration Act 1986 (SA). The Act requires that the arbitration award must be made within the period of six months from the date on which the dispute is referred to arbitration.163

Under the CCA, the ACCC must make a final determination within 180 days from the day an arbitration application is received.164 However, the 180-day period may be extended by ‘clock stoppers’ that provide that certain periods of time are not counted when calculating the 180 period. This occurs where:

§ the ACCC and the parties to the dispute agree to stop the clock;

§ the ACCC gives a direction requesting further information or submissions in relation to the dispute;

§ the ACCC publishes a decision to defer consideration of the dispute while it considers an access undertaking;

§ the ACCC defers arbitrating the dispute while a declaration is under review by the Australian Competition Tribunal.165

Unless the parties agree otherwise, under the Canada Transportation Act a FOA decision must be completed within 60 days, or 30 days for disputes involving freight charges of less than $750,000, after the date on which the submission for the final offer arbitration was received by the CTA.166

The intent of the arbitration mechanism is that the arbitration be concluded in three months. Similarly to the Maritime Service (Access) Act 2000 (SA), the arbitration determination could simply be required to be made within three months from the date on which the dispute is referred to arbitration. The three-month period could

161 DBNGP (WA) Transmission Pty Ltd, Standard Shipper Contract – Full Haul T1 (DBNGP), February 2015, clause 24.10(g).

162 See generally Railways (Access) Code 2000 (WA), clause 26; Maritime Service (Access) Act 2000 (SA), section 19.

163 Maritime Service (Access) Act 2000 (SA), section 30A.164 Competition and Consumer Act 2010 (Cth), section 44XA(1).165 Ibid, section 44XA(2).166 Canada Transportation Act, section165(2)(b).

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commence from the date the AER refers the dispute to arbitration or the date the parties, or the AER in the event of no agreement, appoint the arbitrator. Alternatively, to facilitate timeliness the three-month period could commence on the date the notification of the access dispute is provided to the AER.

The implementation design below is based on the assumption that the notification of the access dispute ‘would start the clock’ for the three-month period. To identify the amount of time the arbitrator should have to make a determination requires working through the steps that must be taken in advance of the arbitration process. Table 4.3 provides the steps provided for by the draft Amendment Bill and proposes time periods in which certain steps could be required to be completed.

Table 4.7: Proposed time periods for arbitration steps

Process Proposed time period

Access dispute notification is provided to the AER

(this ‘starts the clock’)

AER must refer dispute to arbitration and provide notification of referral to parties

Within 5 business days of receiving the notification of access dispute

Parties to agree to appointment of arbitrator and notify the AER, or alternatively notify the AER that they cannot agree to an arbitrator

Within 5 business days of notification of referral

In the event parties have notified the AER that they cannot agree to an arbitrator, the AER will consult with parties and select an arbitrator

Within 5 business days of being notified that parties are unable to agree

Arbitrator must make a determination and provide to parties and the AER

Within 50 business days of the AER being notified of the arbitrator appointed or appointing an arbitrator.This timeframe may be extended to maximum of 70 business days on agreement of the parties involved.

AER approval of extension to make arbitration Within 5 business days of application for extension

Arbitrator to provide written notice of termination to the parties

Can occur at any time

If for some reason an arbitrator does not complete an arbitration, parties may to make a fresh appointment

Parties to make a fresh appointment in event arbitrator does not complete an arbitration within 10 days of arbitration period lapsing (whether standard or extended time frame)

If parties do not make a fresh appointment within period specified, but at least one party wishes to proceed arbitration they must notify the AER.

If parties are unable to agree to a fresh arbitrator, they must notify the AER within 5 days of the 10 day period lapsing.

The AER must make a fresh appointment on an arbitrator.

The AER must make a fresh appointment within 5 days on notification of a party to proceed with arbitration in consultation with parties.

As outlined in Table 4.3, the arbitrator would have 50 business days, following the AER being notified of its appointment, to make a determination. This should allow the arbitration process to be concluded in approximately three months, although this will vary on the number of business days available in the month. For example, given

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December has fewer business days, an arbitration process held over this period may be required to take longer than three months.

While it is intended that arbitration will be concluded in approximately three months, it is recognised that the matters in each arbitration will vary in their nature and complexity. Accordingly, if CA is implemented, provision should be made for the arbitrator to extend the 50-day period to 70 days, on the agreement of parties. If an extension is agreed, the arbitrator should notify the AER of the extension and include in such a notification that the extension has been agreed by parties and identify the new date in which the determination is due.

Should FOA be implemented in a similar nature to the Canada Transportation Act, provision could simply be made for a determination to be made within 50 business days, unless parties agree otherwise. The potential timeframes associated with FOA are examined at section 4.5.4.

Operation

There are two key questions that must be answered in relation to the operation of the determination: when it takes effect; and how long the determination remains in effect.

In relation to when a determination takes effect, there are numerous options:

1. The determination could take effect from the day the determination is made. This is what occurs under section 184(4) of the NGL, which applies to access determinations in respect of scheme pipelines. An access determination made in relation to a scheme pipeline ‘has effect on and after the date specified in the determination’.

2. The determination could take effect after a certain period of time has elapsed since it was made. Under section 44ZO(1) of the CCA, final determinations by the ACCC take effect 21 days after the determination is made, provided none of the parties to the arbitration apply to the Australian Competition Tribunal for review of the determination. If parties apply to the Tribunal for review, the determination has no effect until the Tribunal makes its determination.167 Similarly, the Railways (Access) Code 2000 (WA) requires the determination to take effect after the expiration of 14 days after parties are notified of the determination, provided the other party has not elected to not give effect to the determination.168

3. The determination could be made retroactive. The arbitrator’s FOA determination under the Canada Transportation Act is retroactive to the date of the shipper’s initial submission to the CTA unless the parties decide otherwise. 169 Additionally, any or all of the provisions of a final determination of the ACCC under the CCA may be backdated to apply earlier than the 21 days or after the completion of a Tribunal review.170 In exercising the power to backdate a

167 Competition and Consumer Act 2010, section 44ZO(2).168 Railways (Access) Code 2000 (WA), clause 34(4).169 Canada Transportation Act, section 165(6)(a).170 Competition and Consumer Act 2010 (Cth), section, 44ZO(3).

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determination, the ACCC must have regard to any relevant guidelines in force.171 The potential for backdating of determinations (for example, to the date of the notification of a dispute) may incentivise parties to reach commercial agreement.

4. The determination could take effect from the date and time specified by the arbitrator in the determination. The arbitrator may decide between any of the options outlined from 1-3.

An arbitration determination usually remains in effect for the duration proposed by parties and/or determined by the arbitrator. However, in relation to FOA provided for under the Canada Transportation Act, the arbitrator’s decision will remain in effect for one year, provided the parties did not previously agree on a lesser period.172 The short duration of the determination is intended to provide a disincentive to parties accessing FOA and promote commercial negotiations.

4.4.2.5 Confidentiality

Confidentiality is an important feature of commercial arbitration. The commercial arbitration process, including hearings, and the final determination are commonly confidential. The CAAs provide for various confidentiality obligations that are presumed to apply unless the parties agree otherwise. The ACICA Arbitration Rules require all matters relating to arbitration, including the existence of arbitration, the award, materials created for the purpose of the arbitration and documents produced by another party in the proceedings, to be kept confidential by the parties, Arbitral Tribunal and ACICA unless prior written consent from the parties is obtained.173 Further, unless the parties agree otherwise in writing, all hearings must take place in private.174

In a similar manner to commercial arbitration, under the CCA parties to an arbitration are afforded protections to maintain the confidentiality of commercial information during arbitration. For example, under section 44ZL(1) a party may request that a specified part of a document contains confidential commercial information; and request the ACCC not to give a copy of that part to another party. While the final determination made by the ACCC is confidential, under section 44ZNB(1) the ACCC must prepare and publish a written report about a final determination. The report may include the whole or a part of the determination and the reasons for the determination or the part of the determination and must set out a range of matters, including, among other things, the principles and methodologies applied in making the determination.175 Before publishing the report the ACCC must provide parties with the ability to provide a written submission identifying any information the parties consider should not be published because its confidential commercial nature.176

171 Ibid, section 44ZO(7) and (8).172 Canada Transportation Act, section 165(2)(c).173 ACICA Arbitration Rules (1 January 2016), rule 22.2.174 ACICA Arbitration Rules (1 January 2016), rule 22.1.175 Competition and Consumer Act 2010 (Cth), section 44ZNB(2) and (3).176 Ibid, 44ZNB(6)(b).

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The confidentiality protections afforded are designed to protect the commercial interest of the parties from the disclosure of sensitive information, and from reputational harm arising from public knowledge of the dispute. Commercial arbitration ordinarily provides for complete confidentiality of the arbitration, whereas regulatory arbitration provided for under legislation often only provides for partial confidentiality.

A number of protections as to the confidentiality of commercial matters are already provided by the draft Amendment Bill to parties involved in an arbitration relating to a non-scheme pipeline. In applying Chapter 6 Part 6 of the NGL to Chapter 6A the following protections to confidentiality will apply:

§ a dispute hearing will be held in private unless otherwise agreed by parties;177 and

§ a party to a dispute hearing may request the arbitrator a specific part of a document as confidential and request a copy of that party is not provided to the other party.178

Options:

1. The existence of the arbitration, the arbitration process and determination could be confidential, unless otherwise agreed by parties to the arbitration. This would provide complete protection to the parties from sensitive information being disclosed and/or reputation harm associated with public knowledge of the arbitration. However, if the shipper involved in the arbitration decides to enter a contract with the pipeline operator on the terms and conditions included in the determination, the same level of information disclosure would be required as is the case in relation to other GTAs.179

2. The arbitration determination would be confidential but information on the existence of the arbitration would be published on the AER website. For example, Hydro Tasmania, in its submission to the draft Amendment Bill, suggested that the following information could be made available on the AER website: the non-scheme pipeline involved; the parties to the arbitration, subject to consent of the shipper; the name of the arbitrator; and the time taken for the arbitration. This would provide transparency of the existence and timeliness of arbitration and may assist others in selecting an arbitrator with relevant experience. This level of information would protect the nature of the dispute and the determination, both of which would remain confidential. Given the name of the non-scheme pipeline (and by implication the pipeline operator) would be publicly disclosed, and not necessarily the name of the shipper, this may result in reputation harm to the pipeline operator. In the instance an arbitrator determines to not proceed with or terminate an arbitration, or the shipper decides not to proceed with arbitration, to protect the parties from potential reputational harm it is not appropriate that the above information be published.

177 National Gas Law, section 196.178 Ibid, section 205(1).179 If option 4 of the information options was implemented, the prices paid by the shipper under

the GTA incorporating the access determination would need to be disclosed to the AER.

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4.4.3 Other matters

4.4.3.1 Termination of arbitration

The draft Amendment Bill provides for the arbitrator or the access seeker to terminate the arbitration before a determination is made.

Arbitrator’s ability to terminate arbitration

Section 216O of the draft Amendment Bill provides gives the arbitrator the power to terminate arbitration without making an access determination in particular circumstances (see Box 4.13).


Section 216O – Arbitrator’s power to terminate arbitration(1) The arbitrator may at any time terminate an arbitration without making an access

determination if the arbitrator is satisfied—

(a) the prospective user or user seeking access is not engaging in the arbitration in good faith; or

(b) the terms and conditions on which access is to be granted should be governed by an existing contract or determination; or

(c) a specified dispute termination circumstance has occurred.

(2) In subsection (1), a specified dispute termination circumstance is a circumstance specified by the Rules as being a circumstance, the occurrence of which, entitles the arbitrator to terminate an access dispute without any further step being taken.

The Rules must provide for how the arbitrator notifies the parties and the AER that the arbitration is terminated. Similarly to section 216P, the arbitration should be terminated by providing notice of the termination to the parties and the AER. This notice must be provided with writing (email, fax or post) and must include reason/s for terminating the arbitration. The provision of reasons for terminating the arbitration will ensure that the arbitration is only terminated in accordance with the grounds specified in section 216O(1).

The Rules must define what represents a ‘specified dispute termination circumstance’.

Part 12A, Division 7 of the NGR provides for the AER to terminate an access dispute between a gas distributor180 and a customer (retail customer or real estate developer) about the terms and conditions on which a basic connection service or a standard connection service is to be offered, the proposed or actual terms and conditions of a negotiated connection contract; or about connection charges, if it

180 Under rule 119A of the NGR, distributor means: (a) for a distribution pipeline that is a covered pipeline – a service provider within the meaning of the Law who owns, operates or controls the pipeline; or for a distribution pipeline that is an uncovered pipeline – a nominated distributor nominated to provide customer connection services in respect of the pipeline.

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considers that the dispute could be effectively resolved by some means other than an access determination. If the AER considers this to be the case, the AER may give the parties to the dispute notice of the alternative means of resolving the dispute. The giving of such a notice is a specified dispute termination circumstance for the purposes of section 186(3) of the NGL.181 For example, the AER might give such a notice if of the opinion that a particular dispute could be dealt with more efficiently, and with less expense, by a jurisdictional ombudsman.

Similarly, the National Electricity Law (NEL) 182 and the National Electricity Rules (NER) 183 provide for the AER to terminate an access dispute if it considers a dispute could be effectively resolved by some other means.

Consistent with the definition of ‘specified dispute termination circumstance’ in the NGR and NER, it is proposed that the Rules provide the arbitrator 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 giving of such a notice by the arbitrator would represent a specified dispute termination circumstance under section 216O (2) of the draft Amendment Bill. The arbitrator should also be permitted under the Rules to discuss the appropriateness of alternative means of resolution with parties and the AER.

Proposed approach: Rules to provide the arbitrator 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. Arbitrator must, under the Rules, consult with the parties and may consult with the AER on the appropriateness of alternative means of resolution.

Access seeker’s right to terminate arbitration

Under section 216O the access seeker has the ability to terminate arbitration before an access determination is made.


Section 216P – Access seeker's right to terminate arbitration (1) The prospective user or user seeking access to pipelines services under this Chapter

may terminate the arbitration before an access determination is made by the arbitrator.

(2) The arbitration is terminated under this section by giving notice of termination to— (a) the arbitrator; and (b) the other parties to the arbitration; and

181 National Gas Rules, rule 119ZA.182 National Electricity Law, section 131(1)(d).183 National Electricity Rules, rule 5A.G.3 (dispute between a Distribution Network Service

Provider and a customer) and rule 6.22.3 ((dispute between a Distribution Network Provider and a Service Applicant as to the terms and conditions of access to a direct control service or a negotiated distribution service)

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(c) the scheme regulator.

In accordance with section 216)(2) the access seeker must give notice to the arbitrator, the other parties and the AER. It is proposed this notice be required to be made in writing via email, fax and or post. The access seeker should not be required to provide the reason for the termination to the other party/parties to the arbitration. This would protect the confidentiality of the access seeker and ensure the access seeker is not disadvantaged in any future negotiations with the pipeline operator involved in the dispute.

In the event an access seeker elects to terminate the arbitration, the arbitrator should take this into account in appropriately apportioning the costs.

Proposed approach: Nothing further included on the access seekers right to terminate arbitration in the Rules.

4.4.3.2 Correction of errors

The draft Amendment Bill provides for the Rules to make provision for the correcting errors in an access determination, including in relation to: a clerical mistake, error arising from an accidental slip or omission, a material miscalculation of figures or a material mistake in the description of any person, thing or matter referred to in an access determination and a defect in form.184

Proposed approach: It is proposed that the following process for fixing errors be outlined in the Rules:

§ If an access determination is found by a party to the arbitration, the arbitrator responsible for the determination or the AER 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 is agreed to be an error by both parties and/or the arbitrator as the case may be.

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

4.5 Options

The GMRG has identified five options for the implementation of the arbitration mechanism:

§ Option 1: Conventional arbitration that more closely reflects commercial arbitration.

§ Option 2: Conventional arbitration limited to disputes regarding price.

184 Draft National Gas (South Australia) (Pipelines Access-Arbitration) Amendment Bill 2017, section 216T.

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§ Option 3: Conventional arbitration that reflects elements of commercial and regulatory arbitration.

§ Option 4: Final Offer Arbitration.

§ Option 5: Combined Arbitration.

All options identified would apply the proposed approaches reflecting the key characteristics outlined at 4.4.1.

The options vary in the key components outlined at section 4.4.2, with the exception of the two matters outlined below, particularly with regard to the form of arbitration, the availability of arbitration, the rules of procedure and confidentiality.

As indicated above, the GMRG is proposing 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 augmentation, with the exception of extensions. In the event there is competition for the services, including importantly in the investment sought, the arbitrator should consider this in making his/her determination.

Further, the GMRG is of the view that the only exemption that should be available from the arbitration mechanism is in relation to non-scheme pipelines that do not provide for third party access. However, if pipelines do provide third party access at a later date the exemption should expire and pipeline operators should be required to inform the AER as soon as practicable of this change. This would mean that pipelines subject to a 15-year no coverage determination and non-scheme distribution pipelines would not be afforded an exemption, in and of, themselves but would be eligible for an exemption if they do not provide third party access.

The no-coverage determination protects the pipeline to which it applies from being subject to light or full economic regulation under Part 6 of the NGL. It is conceivable that parties may wish to access pipelines subject to a no-coverage determination. It is recognised that when these pipelines were constructed and foundation contracts agreed, they were subject to competition and a high level of risk. These competitive pressures and market risks are unlikely to be ongoing and thus pipeline operators of existing no-coverage pipelines may have significant market power that they could exercise during negotiations to the detriment of third party users. If the pipeline is not available for third party access then it may be able to obtain an exemption. Further, if the pipeline is dedicated to a particular shipper, both the pipeline operator and shipper should have significant negotiating power and resort to arbitration should rarely be required.

The GMRG is interested in hearing stakeholders’ views on the need for an exemption mechanism, the scope of the proposed exemptions and if any other exemptions may be warranted.

The options are outlined and examined below, identifying the likely advantages and disadvantages, including risks and limitations.

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4.5.1 Option 1: Conventional Arbitration that more closely reflects commercial arbitration

This option involves implementing a conventional arbitration mechanism that more closely reflects commercial arbitration that is provided for under contracts and the CAAs. The key design components of this option are outlined at Table 4.8.

Table 4.8: Option 1 design

Design Component

Description

Form of arbitration

Conventional Arbitration that more closely reflects commercial arbitration

Availability Threshold: Discretionary threshold – inability to provide the service sought and materiality of the dispute.

Scope: Disputes in relation to all aspects of access to the types of services proposed, when prospective shipper is seeking access to a service or services, when an existing shipper is seeking to add a new service to an existing contract; or when existing shipper is renegotiating a new contract to take effect on expiry of the existing GTA.

Rules of Procedure

Arbitrator has flexibility to determine in accordance with Chapter 6, Part 6 of the NGL and may consider an arbitration guide provided by the AER.

Support: Expert advice can be sought by the arbitrator following agreement from the parties on the appropriate cost limit for the advice.

Determination Form: Determination in writing, arbitrator may make an interim determination.

Content: Arbitrator has unconstrained settlement choice and makes determination on what it believes represents a fair and reasonable outcome. Arbitrator to provide reasons for determination but must only deal with the matters in dispute.

Timeframe: Arbitrator has 50 business days, following the AER being notified of its appointment, to make a determination, with the ability to extend to 90 days on agreement of parties.

Operation: The determination takes effect from the day it is made unless determined otherwise by the arbitrator and remains in effect for the period determined by the arbitrator.

Confidentiality The existence of the arbitration, the arbitration process and determination would be confidential, unless otherwise agreed by parties to the arbitration.

Rather than providing for an explicit threshold for access to arbitration, this option would provide guidance in the Rules to the AER (or arbitrator depending upon the content of the final Bill) with guidance on what may represent a ‘good reason’ not to proceed with arbitration. The Rules would require the AER (or arbitrator) to consider in determining whether to proceed with the arbitration in accordance with section 216O (1) the following matters:

1. The ability of the pipeline operator to provide the service/s sought; and

2. The materiality of the disputed matter/s, including the likely costs of arbitration and the value of the service or services being sought.

Similar to all the options presented in this paper, arbitration would be available in the event a dispute arises in the following circumstances:

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§ 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.

Under this option 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:

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

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

o an expansion is required;

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

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

o an interconnection with another pipeline or pipelines is required.

In a similar manner to commercial arbitration, this option would afford the arbitrator with the power to determine the arbitration process, in consultation with parties, including if oral hearing is required. An arbitration guide or guides would be developed by the AER and published on their website providing guidance to parties and the arbitrator on the arbitration process (see section 4.4.1.4).

Under this option, the arbitrator may provide an interim determination in accordance with the NGL. In determining whether to provide an interim determination, the arbitrator should be mindful of the strict timeframe required to make the determination and the likely delay such a determination may present.

This option would not allow the arbitrator to seek administrative or technical assistance from the AER.

The arbitrator would have the discretion to determine the content of the determination but would be required to provide reasons for the determination. Further, the determination would take effect from the day the determination is made unless the arbitrator determines otherwise and remain in effect for the period determined by the arbitrator.

Advantages

This option would likely provide the following advantages:

§ The arbitrator has the ability to make a determination on what it believes represents a reasonable outcome.

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§ Parties can put forward multiple options for the resolution of the dispute/s and are not limited to putting forward one offer.

§ This option is most closely aligned to commercial arbitration provided for by contracts and various statutory instruments. It provides the arbitrator with significant discretion to effectively run the arbitration according the circumstances of the dispute and protects the confidentiality of the arbitration process and determination.

§ Given the similarity with commercial arbitration, parties and arbitrators should be more familiar with, and understanding of, the arbitration process.

§ This option provides for a clear and simple means for parties to seek arbitration in the event of a dispute.

§ This option is the least likely to interfere with pipeline innovation or investment. Resolution of disputes is similar to that under commercial contracts and the confidentiality afforded would not risk the determination setting a precedent for all shippers on that pipeline.

§ Arbitration would be available to resolve any disputes regarding access to services on on-scheme pipeline, not just matters related to price.

Disadvantages

This option has the following disadvantages, risks and/or limitations:

§ This option, similarly to option 2 and 3, risks the determination representing a compromise that is not desirable or equitable to either party. Further, parties are encouraged to provide exaggerated claims.

§ This option relies upon the arbitrator having the requisite skills and knowledge to determine the appropriate procedural rules. The arbitrator has significant discretion and flexibility to run a fair process and the quality of the arbitrated outcomes is dependent on quality of the arbitrator.

§ CA under this option could take significant time to complete, be subject to extension, and incur large costs associated with participating in the arbitration.

§ This option risks terms and conditions associated with access that have no or little impact on price being arbitrated. However, realistically these types of matters should be capable of being negotiated by parties and it is unlikely arbitration would relied upon to resolve these disputes given the expense likely to be involved in doing so. Further, work conducted by the GMRG to standardise GTAs should minimise the risk that an arbitration would be called on that basis.

§ The flexibility afforded to the arbitrator to determine the rules of procedure may allow parties to game the process by strategically delaying the arbitration, and/or by overwhelming the arbitrator with unnecessary information. Similarly to the flexibility provided under CAAs, few procedural protections would be in place to prevent gaming.

§ This option may risk not providing adequate protections to shippers and the arbitration process reflecting the inherit imbalance between parties in relation to the resources they have to devote.

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4.5.2 Option 2: Conventional arbitration limited to disputes regarding price

This option would implement a commercially-focused conventional arbitration mechanism similarly to option 1, except that that arbitration would only be available to resolve disputes relating to price, or matters directly related to price.

Limiting the matters in dispute to price, and matters directly relevant to price, reflects the approach put forward by a number of pipeline operators.

The key design components of this option are outlined at Table 4.9.


Design Component

Description

Form of arbitration

Conventional Arbitration limited to disputes regarding price

Availability Threshold: Discretionary threshold – inability to provide services sought and materiality of dispute.

Scope: Disputes in relation to price and terms and conditions directly related to price of the types of services proposed, when a prospective shipper is seeking access to a service or services, when an existing shipper is seeking to add a new service to an existing contract; or when existing shipper is renegotiating a new contract to take effect on expiry of the existing GTA.

Rules of Procedure


Support: Expert advice can be sought by the arbitrator following agreement from the parties on the appropriate cost limit for the advice.


Content: Arbitrator has unconstrained settlement choice and makes determination on what it believes represents a reasonable outcome. Arbitrator to provide reasons for determination but must only deal with the matters in dispute.



Confidentiality The existence of the arbitration, the arbitration process and determination would be confidential, unless otherwise agreed by parties to the arbitration.

Advantages

This option is likely to provide the following advantages:

§ Similar to option 1, the arbitrator has the ability to make a determination on what it believes represents a reasonable outcome. Parties can put forward multiple options for the resolution of the dispute/s and are not limited to putting forward one offer.

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§ Similar to option 1, the arbitrator has significant discretion to run the arbitration according the circumstances of the dispute and to protect the confidentiality of the arbitration process and determination.

§ Limiting the nature of disputes to price and/or matters directly linked to price would limit the number of disputes eligible to access arbitration to those matters that have an impact on price, the matter most likely to be in dispute.

§ This option would limit access to arbitration to instances where the imbalance in negotiating power is perceived to be resulting in higher prices than would be the case in a competitive market. It would focus arbitration on the addressing the widespread belief, particularly in relation to the east coast gas market, that pipeline operators have market power and are exercising this power by engaging in monopoly pricing.

§ Limiting the matters in dispute able to be arbitrated, would help ensure parties do not unnecessarily go to arbitration on more minor matters and facilitate timeliness.

Disadvantages

This option has the following disadvantages, risks and limitations:

§ This option, similar to option 1 and 3, risks the determination representing a compromise that is not desirable or equitable to either party. Further, parties are encouraged to provide exaggerated claims.

§ This option relies upon the arbitrator having the requisite skills and knowledge to determine the appropriate procedural rules, including what factors and documentation is relevant to take into consideration in applying the overall objective outlined in the pricing principles.

§ The flexibility afforded to the arbitrator to determine the rules of procedure may allow parties to game the process by strategically delaying the arbitration, and/or by overwhelming the arbitrator with unnecessary information.

§ Parties may deliberately include inequitable terms into an otherwise equitable offer (with respect to price) in order to gain ground with respect to an issue to which the other side would normally never agree.

§ This option may risk not providing adequate protections to shippers and the arbitration process reflecting the inherit imbalance between parties in relation to the resources they have to devote to the arbitration process.

4.5.3 Option 3: Conventional Arbitration with additional procedural protections and partial transparency

This option would implement a conventional arbitration mechanism that provides additional procedural protections and transparency of the existence of arbitration. The primary differences between option 1 and this option is that:

§ further procedural guidance is provided to the arbitrator;

§ the arbitrator could seek administrative or technical support from the AER; and

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§ information on the existence of the arbitration would be provided on the AER website.

The key design components of this option are outlined at Table 4.10.


Design Component

Description

Form of arbitration

Conventional Arbitration with enhanced procedural protections and partial transparency

AvailabilityThreshold: Discretionary threshold – inability to provide the service sought and materiality of the dispute.

Scope: Disputes in relation to all aspects of access to the types of services outlined, when prospective shipper is seeking access, when an existing shipper is seeking to add a new service to an existing contract; or when existing shipper is renegotiating a new contract to take effect on expiry of the existing GTA.

Rules of Procedure


Hearing: Arbitrator has the discretion to determine if an oral hearing is required, but must hold a hearing if a party requests a hearing.

Documentation: Rules to require that the documentation provided to the arbitrator be directly relevant to the matter/s in dispute. Rules to require the arbitrator at the commencement of the arbitration to provide for the cut-off date and time for provision of information. Under the Rules, the arbitrator may limit the amount of documentation provided and focus parties on the key issues by providing a list of questions for the parties to address.

Support: Expert advice can be sought by the arbitrator following agreement from the parties on the appropriate cost limit for the advice. Arbitrator can also seek administrative and/or technical support from the AER.


Content: Arbitrator has unconstrained settlement choice and makes determination on what it believes represents a reasonable outcome. Arbitrator to provide reasons for determination but must only deal with the matters in dispute.



Confidentiality The arbitration determination would be confidential but information on the existence of the arbitration would be published on the AER website, 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.

Under this option the arbitrator would retain some procedural flexibility. However, the Rules would require that the documentation provided by parties to the arbitrator be directly relevant to the matter/s in dispute. Further, the Rules would require the arbitrator at the commencement of the arbitration to provide for the cut-off date and time for provision of information. Under the Rules, the arbitrator could also limit the

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amount of documentation provided and focus parties on the key issues by providing a list of questions for the parties to address.

Advantages

§ This option would still provide the arbitrator some procedural flexibility (for example, to determine if a hearing should be held), but would also require the arbitrator to set a strict cut-off date and time for the provision of information and well as require parties only to provide information to the arbitrator that is directly relevant to the matters in dispute. These procedural requirements may assist smaller parties who do not have the same resources available to participate in arbitration. This should also reduce the ability of parties to game the arbitration process.

§ The procedural requirements may help to minimise the costs associated with the arbitration process.

§ The arbitrator could seek administrative or technical support from the AER in undertaking the arbitration, including in applying the arbitration principles that will guide the determination. This recognises that the AER has administrative oversight of the arbitration mechanism as well as relevant experience and expertise in the gas pipeline sector. In making the determination, the arbitrator may then give such weight to any opinion, advice or comments given by the regulator as he or she thinks fit. This may help ensure that the arbitrator has adequate assistance to make the determination within the three month timeframe envisioned.

§ Information on the existence of the arbitration would be published on the AER website. This would provide transparency of the existence and timeliness of arbitration and may assist others in selecting an arbitrator with relevant experience. The nature of the dispute and the determination would remain confidential. The disclosure of the non-scheme pipeline (and by implication the pipeline operator) and not necessarily the name of the shipper, would incentivise pipeline operators to reach an acceptable outcome through commercial negotiations. In the instance an arbitrator determines to not proceed with or terminate an arbitration to protect the parties from potential reputational harm it is not appropriate that the above information be published.

Disadvantages

§ This option, similar to option 1 and 2, risks the determination representing a compromise that is not desirable or equitable to either party. Further, parties are encouraged to provide exaggerated claims.

§ The disclosure of the existence of arbitration and the pipeline in which it relates would result in reputational harm to the pipeline operator, and potentially the shipper (if they are also named), negatively impacting on other and/or future commercial negotiation processes.

§ The provision of support from the AER may undermine the perceived, or actual independence, of the arbitrator. While the arbitrator may give whatever weight it wants to the advice of the AER, this option may risk the arbitrator taking on a

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more regulatory perspective or simply applying the AER’s advice. This issue could be overcome by limiting the nature of assistance able to be requested.

4.5.4 Option 4: Final Offer Arbitration

This option would implement Final Offer Arbitration (FOA). This option is based primarily on the FOA provided for under the Canada Transportation Act and the UNCITRAL Rules of FOA. The key design components of this option are outlined at Table 4.11.


Design Component

Description

Form of arbitration

Final Offer Arbitration

Availability Threshold: NoneScope: Disputes in relation to all aspects of access to the types of services outlined, when prospective shipper is seeking access, when an existing shipper is seeking to add a new service to an existing contract; or when existing shipper is renegotiating a new contract to take effect on expiry of the existing GTA.

Rules of Procedure

In addition to Chapter 6, Part 6 of NGL, the Rules would outline key arbitration steps and timeframes.Hearing: only to be held if necessary for both parties to put their forward case. If a party requests a hearing, an oral hearing must be held.Documentation: Arbitrator must have regard to the information provided by the parties in support of their final offers and, unless the parties agree to limit the amount of information to be provided, to any additional information that is provided by the parties at the arbitrator’s request.Support: Expert advice can be sought by the arbitrator following agreement from the parties on the appropriate cost limit for the advice. Arbitrator can also seek administrative and/or technical support from the AER.Timeframe: Parties must submit final offers to the arbitrator and the AER within 10 days of the dispute being referred to arbitration.

Determination Form: Determination in writing, arbitrator cannot make interim determination.

Content: Arbitrator is constrained to selecting one of the disputant’s final offers, arbitrator does not provide reasons, but parties may request reasons within 5 days of notice of the determination.

Timeframe: Arbitrator has 50 business days, following the AER being notified of its appointment, to make a determination, with no provision for extension.

Operation: Takes effect from the day made unless determined otherwise by the arbitrator and remains in effect for period of one year provided parties did not decide on a another period.

Confidentiality The arbitration determination would be confidential but information on the existence of the arbitration would be published on the AER website, 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.

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This option would include specified arbitration steps and timeframes in the Rules to ensure it is completed in a timely manner. Indicative timeframes, based on the FOA provided by the Canada Transportation Act are as follows:

§ The party must receive written notice of the disputing party’s intention to submit a matter to the AER for FOA at least five days prior to the party doing so.185

§ Within 10 days of of the dispute being referred to arbitration, parties must make their final offers, which should clearly outline the matters agreed by parties and the matters in dispute.186 If one party does not submit a final offer within 10 days, the final offer submitted by the other party is deemed to be the final offer selected by the arbitrator.187

§ The arbitrator is required to conduct the arbitration proceedings as expeditiously as possible and, in the manner the arbitrator considers appropriate having regard to the circumstances of the matter.188

§ Within fifteen days of the AER notifying the parties of the arbitrator’s appointment, the parties must exchange the information that they intend to submit to the arbitrator in support of their final offers and then within five days after receipt of the information each party may direct interrogatories to the other, which shall be answered within ten days after their receipt.189

§ The arbitrator must have regard to the information provided by the parties in support of their final offers and, unless the parties agree to limit the amount of information to be provided, to any additional information that is provided by the parties at the arbitrator’s request.

Under this option, the AER could also provide administrative or technical assistance if requested by the arbitrator.190

Advantages

§ The arbitrator is constrained to selecting one of the disputant’s final offers and cannot split the difference or select an alternative position. This should help remove the complexity involved in the arbitrator reaching a determination that represents an equitable outcome for both parties, as required by CA.

§ Given the significant risk involved for each party in not having their offer selected, both parties should put forward final offers that are closer together and are less extreme than under CA. This may motivate parties to reach agreement, promote pre-arbitration concessions, good faith negotiations and less reliance on arbitration.

§ This option could be completed within a shorter time period without needing to provide for the provision of an extension on the agreement of parties. Arbitration would likely be completed within the three months envisioned.

185 Canada Transportation Act, section 161(3).186 Ibid, section 161.1(1).187 Ibid, section 161.1(3).188 Ibid, section 163(2).189 Ibid, section 163(3) and (4).190 Ibid, section 162(2).

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§ This option is designed to only provide short term relief of disputes and bring parties to negotiating table again.

Disadvantages

§ This form of arbitration has not yet been applied and tested in Australia. This means that parties and arbitrators are not familiar with, and have no experience of how FOA works. Parties may be reluctant to try an unproven mechanism. Alternatively, parties may not understand the risks of using final-offer arbitration and not be incentivised to compromise in negotiations.

§ FOA precludes compromise, which creates winners and losers of an arbitration. The determination will favour one side and be less equitable to the other. This can adversely affect ongoing commercial relationships.

§ This option could risk being gamed by parties. If either or both sides make offers which include terms that are inequitable to the other side, the arbitrator is left with no choice but to choose the best of the inequitable options. Parties may deliberately include inequitable terms into an otherwise equitable offer in order to gain ground with respect to an issue to which the other side would normally never agree. If both parties participate in such behaviour, then one party will ‘be rewarded while the other suffers.191 However, consistent with section 216H(2) of the draft Amendment Bill parties will be required to include in their dispute notice the matters that are agreed and the matters in dispute. This risk could be somewhat mitigated by requiring parties in the Rules to submit offers that include, and indicate, which matters have been agreed and which have not.

§ While FOA is intended to promote convergence between parties and discourage arbitration, theoretical studies have found that there is not necessarily less disputes under FOA than CA.

It is recognised that elements of this option could be amended, for example this option could require:

§ the arbitrator to provide reasons for the determination;

§ the arbitrator to limit the amount of information able to be provided by parties; or

§ the existence of the arbitration and determination to be confidential similar to option 1 and 2.

Stakeholders are invited to provide feedback on areas they believe this option could be strengthened to overcome some of the disadvantages identified in responding to this options paper.

4.5.5 Option 5: Combined arbitration

This option would implement a combined arbitration mechanism, which, as the name suggests, combines elements of conventional arbitration and final offer arbitration. 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

191 Lok, A. 2008. Final-offer arbitration, ADR Bulletin, 10(4), p. 2.

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offers, CA rules are used. The key design components of this option are outlined at Table 4.12.


Design Component Description

Form of arbitration Combined Arbitration

Availability Threshold: NoneScope: Disputes in relation to all aspects of access to the types of services outlined, when prospective shipper is seeking access, when an existing shipper is seeking to add a new service to an existing contract; or when existing shipper is renegotiating a new contract to take effect on expiry of the existing GTA.

Rules of Procedure Vary depending on which form of arbitration the arbitrator elects to apply but key steps and decision points need to be specified

Determination Form: Determination in writing, arbitrator may make interim determination in CA applied.Content: Provision of reasons but only deal with the matters in dispute.Timeframe: 60 days to provide determination from AER notification.Operation: Takes effect from the day made unless determined otherwise by the arbitrator. If FOA applies, remains in effect for period of one year provided parties did not decide on a another period. If CA applies, remains in effect for period determined by arbitrator.

Confidentiality The arbitration determination would be confidential but information on the existence of the arbitration would be published on the AER website, including: the form of arbitration used; 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.

Advantages

§ Theoretical studies have suggested that combined arbitration offers increased settlement rates (for example, disputes not entering arbitration at all or arbitration being terminated before a determination is made because agreement is reached between parties) compared to FOA.

Disadvantages

§ A major disadvantage of this option is that there are no examples of it being used in practice to resolve disputes. Thus, it remains unclear if this option will provide a credible threat.

§ This option is incredibly complex and does not provide a clear and simple means of arbitration. The Rules would need to provide for both FOA and CA with arbitrator determining process associated with both. Parties and arbitrators would be required to familiarise themselves with two different forms of

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arbitration, which would likely require different rules of procedure, determination form and content and well as the application of different pricing principles.

§ Significant discretion is provided to the arbitrator to determine the form of applicable arbitration to each dispute, which will significantly impact upon the determination. Given FOA is not used in Australia, the arbitrator may not have the requisite skills and knowledge to be in a position to make this decision.

§ This option could be susceptible to gaming, as parties may deliberately provide extreme final offers so as to ensure CA is used rather than FOA which bears greater risk of an unfavourable outcome.

§

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5. Arbitration principles Irrespective of the form the new arbitration mechanism takes, the arbitrator will require some guidance on the matters to be taken into account when making its determination. Provision was made for this in the draft Amendment Bill, with section 216M stating the arbitrator should take into account:

§ the NGO;

§ the pricing principles specified in the NGR;

§ any other principles specified in the NGR; and

§ any other matters the arbitrator considers appropriate.

In the feedback that was received in response to the draft Amendment Bill, stakeholders raised concerns about requiring the arbitrator to take into account the NGO and ‘any other matters the arbitrator considers appropriate’. In some cases stakeholders were of the view that the NGO, which has economic efficiency as its central focus, was an inappropriate standard to apply given the intent of the new framework is to provide a commercially-focused arbitration mechanism. Other stakeholders were of the view that including the NGO and ‘any other matters’ would introduce a considerable degree of uncertainty into the arbitration and adversely affect the timeliness of the arbitrator’s decision.

The GMRG agrees with these views and has proceeded on the basis that the only matters the arbitrator should be required to take into account are the pricing principles and any other principles specified in the NGR.

The purpose of the new arbitration mechanism is, as noted in section 2.2, to provide for the resolution of disputes between shippers and pipelines, and to do so in a manner that reduces the imbalance in negotiating power between the parties. It is also expected to:

§ have commercial negotiation continue as the principal means through which access terms and conditions are met, with the dispute resolution process operate as a (hopefully seldom-used) fall-back;

§ minimise the adverse effects on investment; and

§ have application across the broad range of services offered by pipeline operators.

The inclusion of pricing and other principles in the new framework will advance these objectives. Well-specified principles will provide more certainty as to the outcome of an arbitration if this were to be sought, and, in doing so, increase the likelihood of parties reaching a commercial agreement without recourse to arbitration. If the principles guide or bind the arbitrator as to the issues it may have regard to and/or the approach to be used when considering a particular issue, they may also affect the extent to which the arbitration mechanism alters the negotiation position between the parties. Similarly, the guidance or instructions provided to the

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arbitrator may influence the risk as to whether a decision of an arbitrator may have an adverse impact on investment.

The remainder of this chapter focuses on the nature and form that the pricing principles and other principles could take in the Rules and sets out a number of options for these principles. The GMRG’s preliminary view on the option that should be implemented is presented in Chapter 6, while Chapter 7 sets out some specific questions in which further feedback from stakeholders is sought.

5.1 Pricing principles

The development of the pricing principles options has been informed by some preliminary feedback from stakeholders on the way in which they expected an arbitrator to assess the reasonableness of a pipeline operator’s offer, which centred on a comparison of the offer with either:

§ the prices payable for comparable services; or

§ the costs the pipeline operator incurs in providing the service.

The development of the options has also been informed by a review of the pricing principles that have been adopted in other access regimes, an overview of which is provided in Appendix E. In short, this review revealed that:

§ In a small number of cases, the arbitrator has relatively broad discretion on how the price is to be assessed or determined and is required to have regard to a range of factors when doing so.192

§ A number of regimes provide an express requirement for the arbitrator to set a cost-based price, but leave it to the arbitrator to determine how this is to be determined.193

§ A number of regimes provide the further requirement for prices to be set with reference to actual cost, with differing levels of guidance as to how the actual cost should be determined.194

§ A number of regimes provide the further requirement for prices to be set with reference to hypothetical costs, together with differing levels of guidance as to how such prices should be determined.195

192 This is the case in the Maritime Services (Access) Act 2000 (SA) and the Railways (Operations and Access) Act 1997 (SA).

193 This is the case in Part IIIA of the CCA and the Victorian Essential Services Commission Act 2001.

194 This is the approach that has been taken in a number of price monitoring regimes, including the regime that applies to the Port of Melbourne and airports in both Australia and New Zealand. It has also been taken in the NGL.

195 This was the approach that was previously taken in the telecommunications industry in Australia and is also taken in the AustralAsia Railway (Third Party Access) Act 1999 and Western Australian Railways (Access) Code 2000.

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The experience in other regimes suggest that one of the first issues that must be considered when developing the pricing principles is whether the arbitrator is to be provided with:

§ relatively broad discretion when making its determination on price by, for example, being required to consider whether the price offered is reasonable taking into account the broader principles set out in section 5.2; or

§ more limited discretion when making its determination on price by, for example, directing the arbitrator to employ a particular test or methodology when assessing whether the price offered is reasonable.

If the arbitrator’s discretion is to be more limited, then the next issue that must be considered is the test or methodology the arbitrator should be required to employ. As outlined above, the two tests that stakeholders have identified, which have also been used in other regimes, are to require the arbitrator to carry out its assessment of the reasonableness of the offer by comparing this with:

§ the prices payable for comparable pipeline services; or

§ the costs the pipeline operator incurs (including a return on capital) in providing the service.

If either of these tests was adopted, then consideration would also need to be given to whether it would be sufficient for the pricing principles to state the test that the arbitrator is to employ, or if further guidance on how the test is to be carried out would need to be provided in the pricing principles.

The remainder of this section provides further detail on the tests that could be used by an arbitrator to assess the reasonableness of the price offered by a pipeline operator if a decision was made that the scope of its discretion should be more limited. It also considers whether there would be value in specifying separate pricing principles for services that are derivatives of, or ancillary to, firm transportation services.

5.1.1 Prices payable for comparable pipeline services

If the test the arbitrator is to employ is based on the prices payable for comparable pipeline services, then the price benchmarks the arbitrator could consider include:

(a) the prices charged by other pipelines for comparable services, which may need to be adjusted to reflect differences across pipelines and services;

(b) the prices the pipeline operator that is party to the dispute charges other shippers for comparable services; and/or

(c) the prices struck in foundation contracts for comparable services in those cases where a pipeline has recently been constructed and there was competition for the development of the pipeline.

Box 5.15 provides further detail on these benchmarks.

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Box 5.15: Price benchmarks

When comparing the price offered by a pipeline operator with the prices payable for comparable pipeline services, the arbitrator could compare the offer with:

§ the prices charged by other pipelines for comparable services;

§ the prices the pipeline operator charges other shippers for comparable services; and/or

§ the prices struck in foundation contracts in those cases where the pipeline was developed as a result of a competitive process.

Prices charged by other pipelinesUnder the first option, the task would be to establish a representative set of prices from other pipelines and to adjust those prices to make them comparable to the circumstances of the pipeline in question. The basis for the adjustment would be the relative value or cost associated with the service between the benchmark and target pipelines. There are a number of matters for which it may be appropriate to adjust observed prices to make them comparable with a target firm, which may include differences in:

§ the capacity and utilisation of the pipelines, to reflect differences in unit cost arising from economies of scale and the extent to which they can be realised;

§ relative risk;

§ transportation distances;

§ possibly the relative age of the pipelines, reflecting the potential for the recovery of cost not to be uniform over a pipeline’s life;

§ the reliability of supply, reflecting the cost and value associated with different delivery reliabilities, and/or

§ commercial terms (e.g. term and credit risk).

One question that would need to be considered if this option is implemented is whether the adjustments are feasible and hence can be implemented.

Prices charged by the pipeline operatorThe second option would involve comparing the offer with the basket of prices the pipeline operator is charging other shippers for equivalent services. One stakeholder has suggested that this benchmark could be calculated as the 12-month volume weighted average of all prices on offer (including foundation and non-foundation contracts), and then adjusted for differences in the commercial terms offered (e.g. term and credit risk of the shipper in question).

Given the benchmarking would occur against existing prices for the same pipeline, there would not be a need to adjust for the other factors listed for the previous sub-option. However, as noted in section 3.3.2.2, there may be a number of other differences between contracts on an existing pipeline (for example, differences in maximum hourly flexibility, distances transported, price structures etc). Adjustments may therefore be required to ensure those prices are comparable. Like the first option, it is not clear how feasible this would be in practice.

The other problem with this option is that if the pipeline operator is not subject to a competitive constraint, then the prices it charges other shippers may not provide a good basis for assessing the reasonableness of its offer (i.e. because it may have engaged in monopoly pricing). The same observation can also be made in relation to the first option.

Prices struck in foundation contracts

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Another price based option that could be considered if a pipeline has recently been constructed is to use the prices struck in the foundation contracts as the basis for assessing the reasonableness of the offer. The benefit that this option has over the other two options is that if there was effective competition to build the pipeline, then the prices struck in these contracts should be cost reflective and provide a good starting point for the assessment of the prices subsequently offered by the pipeline operator.

The other advantages that this option offers are that it would:

§ reduce the possibility that an arbitration may undermine the foundation contract arrangements, which could occur if the arbitrator adopted a price that was lower than the foundation contract prices and the foundation contracts had most favoured nation clauses; and

§ reduce the risk of asymmetric truncation of returns.

One potential problem, however, with relying on the prices struck in foundation contracts is that over time their informational value may diminish because, for example:

§ demand may be substantially different to what was assumed when the foundation contracts were entered into;

§ the costs of operating the pipeline may be substantially different to what was assumed when the foundation contracts were entered into; and

§ the foundation contracts may have provided for the recovery of capital to be either front-end loaded or back-end loaded.

This shortcoming could potentially be overcome by only allowing an arbitrator to consider the prices struck in foundation contracts for the first 15 years of the pipeline’s life.

Another potential problem that would need to be overcome with this option is that if the services provided under the foundation contract differ from what the shipper is seeking (for example, the shipper may be seeking more maximum hourly flexibility), then some adjustments may need to be made to the foundation contract price to make the prices comparable. The feasibility of making these types of adjustments is yet to be determined.

The main advantage of this option is that the arbitrator would not be required to (or indeed be allowed to) inquire into the cost of service provision, but instead would focus on readily available information (i.e. available prices). By avoiding cost being the central consideration, the issues the arbitrator should be required to address should be more straightforward and hence assist in the timeliness of dispute resolution.196

While this option may appear relatively straightforward, it is unclear whether the limitations outlined in section 3.3.2.2, which would affect options (a), (b) and (c), could be overcome given the bespoke nature of the gas transportation agreements and the influence this can have on the prices paid for services. It is also unclear how much reliance could be placed on the price benchmarks in (a) and (b) given the concerns shippers have raised some operators engaging in monopoly pricing. While the foundation contract price benchmark in (c) is not subject to the same issue, there are still a number of limitations with this option, as outlined in Box 5.15.

196 Having said that, some reference to costs may be important (for example, to adjust prices as necessary to make the benchmark prices comparable).

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5.1.2 Cost of service provision

As an alternative to the price option outlined above, the arbitrator could be required to assess the reasonableness of the offer by reference to the cost of service provision.

The key advantage of this option is that it would not require an assumption to be made about the reasonableness of the prices charged by other pipelines, or that the prices charged previously by the pipeline itself, are reasonable. Moreover, notwithstanding the potential for an assessment against cost to be more complex, this is precisely the inquiry that shippers have said they expect the arbitrator to undertake.

One potential issue with this option is that the act of tying prices to a measure of cost creates the potential for successful pipeline projects to have their returns capped, but for the losses from unsuccessful projects to be borne. The resulting truncation of returns, if material, has the potential to deter investment. The principal means of addressing the truncation potential would be to ensure that the arbitrator is required to take into account and reflect in any award a commercial return that takes account of the risk of the project in question, including the risk of asset stranding. Whether this is likely to be an effective response to the potential for investment to be deterred would need to be assessed.

A point that it is worth highlighting at this stage is that while principles that focus on the cost of provision will lead an arbitrator to inquire into issues similar to those considered by regulators, this of itself does not imply that the arbitration mechanism will no longer be a commercial arbitration, nor deliver a commercial outcome. The reasons for this are as follows.

First, regulators focus on the cost of provision because this provides the price at which continued service provision – including investment – will be commercial for the regulated business. Thus, a regulator’s concern about cost reflects an acknowledgement that there is a real-life commercial constraint to an entity’s preparedness and ability to continue to invest in a regulated service. Consistent with this, it is also understood that cost of provision forms the basis for access pricing negotiations in unregulated infrastructure sectors. Indeed, if the arbitrator was to opine on the reasonableness of prices without reference to cost then there is a potential for it to make an award that has an adverse impact upon investment, which could go against one of the key objectives for the regime.

Secondly, if the cost of provision option was to be pursued, it is envisaged that the pricing principles themselves would emphasise the need to undertake a higher-level inquiry than required of a regulator when determining cost-based prices. For example, while the NGR place a positive obligation upon the AER to confirm the prudence and efficiency of past (actual) expenditure, such an efficiency would be inappropriate for the arbitration mechanism. Similarly, while the NGR requires the rate of return to reflect a “benchmark efficient entity”, it is envisaged that the arbitrator would be directed to determining a commercial return and to consider the full circumstances of the risk of the pipeline in question when determining this.

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Thirdly, under the new arbitration mechanism the matters that are subject to dispute would be limited to those issues that are identified by the parties. As the respective parties will be well-informed commercial entities and required to bear the costs of their participation in the dispute (as well as a share of the cost of the arbitrator), it is anticipated that only those issues of sufficient materiality will ever be taken to dispute. In addition, the arbitrator’s role will be limited to determining those matters that are subject to dispute and to do so in expeditiously a manner as possible – there will be no capacity for the arbitrator to widen the matters in dispute or to otherwise seek more precision in the outcome than sought by the parties.

Fourthly, it would be expected that a dispute between two commercial parties would encourage a greater sensitivity to the positions of the counterparty where they were commercially reasonable than may be the case where an independent regulator is setting prices. Shippers – also being commercial entities – would be alert to the constraints imposed on a pipeline operator by capital markets and have a direct commercial interest in the security and reliability of gas supply. Moreover, in the majority of cases, the disputes that come before an arbitrator are likely to involve parties that already have a longstanding commercial relationship and one that is expected to continue past the next pricing period, or onto other pipelines and that both parties would place value in maintaining a relationship. It would be expected that the understanding of commercial pressures, commercial interest in security and reliability and knowledge that the desirability of maintaining a commercial relationship would provide a discipline over the matters that were taken to dispute and the positions that are placed.

If the cost of service provision option is to be selected, then consideration would need to be given to the method to be used to calculate the cost of providing services. This is considered in further detail below.

5.1.2.1 Alternative cost of service benchmarks

Calculating the cost of service provision is not straightforward for an infrastructure facility. An important characteristic of infrastructure is that a substantial proportion of capital costs are incurred upfront and expected to be recovered over an extended period (for example, 60 or more years), which is typically much longer than the period over which the arbitrator may be called upon to assess the reasonableness of prices. Thus, the cost incurred in the period being assessed by the arbitrator will depend upon the extent to which the cost has been recovered in previous periods, and the extent to which costs are to be recovered after the assessment period.

Two standards that have emerged for testing the reasonableness of a proposed price or prices for a particular period against the cost of provision, both of which have been applied in numerous regimes. These standards are:

§ The hypothetical new entrant standard – In this case the price for a period is based on the price that would be charged by a hypothetical new entrant at the commencement such that it would expect to recover its costs (including a commercial return). An implication of this is that the firm in the market in question is assumed to recover its costs over time in a manner that would be permitted by a firm that is subject to an ongoing (hypothetical) threat of entry.

§ The actual cost standard – In this case the capital cost associated with any period (and therefore the reasonableness of prices) is based upon a transparent

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allocation of (historically incurred) capital costs to the period being assessed. Thus, a key component of this standard is that an account is kept of the value of the assets over time, being increased to reflect new capital expenditure and reduced to acknowledge the capital that has been recovered through prices.

The “hypothetical new entrant” standard was the basis for the setting of telecommunications access prices in Australia prior to 2011197 and is applied currently in New Zealand in relation to the legacy copper network. It is also used on the Adelaide to Darwin railway (in the circumstances where the arbitrator finds the threshold for competition not to be met) and under the WA freight rail access regime. The “hypothetical new entrant” standard was also applied in New Zealand over the 1990s in the information disclosure regime (equivalent to price monitoring) that applied to the electricity distribution businesses.

The “actual cost” standard is now the default standard in Australia where price control (full regulation) is applied (including across all energy networks and water utilities). It has also been applied in the information disclosure / price monitoring regimes that apply to airports in Australia and New Zealand as well as in the price monitoring regime that applies to the recently privatised Port of Melbourne. In addition, the “revenue and pricing principles” contained in the NGL also envisage the actual cost standard for assessing cost, which is the principal guidance that applies in the arbitration mechanism for “light regulation” pipelines.

The issues raised by these two standards are discussed in Appendix F.

5.1.2.2 Analysis of the two cost standards

The feature of the ‘hypothetical new entrant’ standard that is most appealing is its consistency with encouraging direct competition for infrastructure services. However, many pipelines are not subject to any competition and the prospect of material direct competition between pipelines emerging across the majority of the pipeline network would appear remote. An enduring lack of material competition was one of the key reasons why the ACCC decided to move from a hypothetical new entrant standard for Telstra’s copper network to an actual cost standard.198 Some of the other known shortcomings of this method are that:

§ it can be extremely difficult to implement in practice and where it has been applied it has been subject to significant disputes about how the standard should be applied;

§ the potential for the periodic revaluation of assets to generate material windfall gains or losses and ongoing discord between pipeline operators and shippers; and

§ it may not support new investment because prices are set independently of cost.

197 The regulation of Telstra’s “copper” fixed line services transferred to a building block approach in 2011 where an initial regulated asset base value was set and treated as a deemed historical cost.

198 ACCC, ‘Review of the 1997 telecommunications access pricing principles for fixed line services Draft report’ September 2010, pp.15-16.

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Given these shortcomings, the GMRG is of the view that if a cost standard is to be employed, it should be based on the ‘actual cost’ standard. This is consistent with the view expressed by shippers that the prices charged by some pipeline operators are not cost reflective and either build in inappropriate revaluations and/or do not properly account for past recoveries of capital from shippers. While no conclusion has been made as to whether these assertions are correct, it would seem inappropriate for the new arbitration mechanism to not have the scope to address this contention.

The adoption of the ‘actual cost’ standard would ensure that shippers’ concerns are addressed going forward, with the asset value that is the basis for the calculation of actual cost taking into account actual future recoveries and excluding future inappropriate revaluations. Whether shippers’ concerns about past recoveries and revaluations would be addressed depends upon how the starting asset values are determined and the guidance that is provided to the arbitrator on that issue, which is discussed further below.

In addition, the greater reliance on known and measurable quantities under the ‘actual cost’ standard, and the consequent narrowing of the areas for potential dispute, is a significant advantage. The requirement for an asset value to be maintained over time and to reflect actual capital expenditure and recoveries could be given effect as part of the new information disclosure requirements (see section 3.4.3).

If the ‘actual cost’ benchmark is to be used, then further guidance on how this is to be calculated may need to be included in the pricing principles. Some of the issues that could be addressed through the pricing principles if further guidance is required is provided in Box 5.16.

Box 5.16: Further guidance on the application of the actual cost standard

If the actual cost benchmark is to be employed, then the arbitrator may require further guidance on how to determine the value of the pipeline and other inputs.

Guidance on asset valuationAs noted above, a key concern of shippers – and hence likely source of dispute – is the value that is assigned to the assets employed. Under the ‘actual cost’ standard, this will be translated into the debate about the value for the assets.

An important issue, therefore, is whether further guidance can be provided to an arbitrator, or whether other administrative processes could be undertaken, that may reduce some of the potential areas of dispute over the starting asset values.

At one end of the spectrum, the AER could be asked to determine an appropriate starting asset value for each of the pipelines, rather than leaving it to the arbitrator to resolve. This could be a relatively efficient means of resolving what may be an inevitable area of dispute, and possibly also permit a more nuanced inquiry than may be possible in an arbitration (for example, it may be possible to provide the AER with a broader discretion than may be desirable for an arbitrator). Having an upfront determination on the starting asset values would be consistent with the information disclosure / price monitoring regimes for the New Zealand airports, as well as for the recently privatised Port of Melbourne.

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The alternative approach would be to leave the matter to be determined by the arbitrator, but to provide some additional guidance. As noted above, the main proposition of the shippers is that the starting asset value should reflect historically incurred costs, less costs recovered to date. This principle has had some support, albeit noting also that this is a potentially very difficult principle to apply for older assets.

One option would be to follow the structure of the guidance for setting an initial asset value that is contained currently in the NGR, which has a preference for basing initial asset values on historically incurred costs for recently constructed pipelines. This could mean:

§ for pipelines that had already had an initial asset value determined – applying that value and adjusting it for subsequent capital expenditure and capital recovered;

§ for pipelines constructed since the commencement of the Gas Code (i.e. post November 1997) – applying construction costs and adjusting it for subsequent capital expenditure and capital recovered; and

§ for pipelines constructed prior to November 1997 that have not had an initial asset value determined – permitting the arbitrator to determine a reasonable value for the assets having regard to the factors set out in sections 8.10-8.11 in the Gas Code, although this list of factors could be narrowed down based on experience under the Gas Code.199

It may also be possible for the AER to be asked to undertake administrative tasks to assist an arbitrator in this regard. For example, there may be value in the AER preparing a guideline on asset valuation techniques, or to otherwise assist the arbitrator when it is determining the value to ascribe to the assets.

Guidance on other inputsThe remainder of the inputs that may be the subject of a dispute in a cost based assessment are matters where the objective for the arbitrator would be fairly clear, and hence where it would not be expected that guidance would be material to the decision of an arbitrator. Arguably the key contribution of any additional guidance would be to emphasise the distinction between the assessment of cost that is intended for the commercially arbitration from the assessment that the AER is required to undertake when determining cost-based prices.

To the extent that additional guidance was to be provided, the Revenue and Pricing Principles in the NGL may form a useful starting point, with the following amendments:

§ it may be appropriate to restate the objective of setting prices to provide a reasonable expectation of efficient cost without the efficiency rider (with the proviso that it is intended to permit the reasonableness of forecasts to be assessed);

§ the criterion dealing with the rate of return has a focus on delivering a commercial return, in light of the full characteristics of the risk of the pipeline in question – the prescription that is unwarranted for a commercial arbitration mechanism is found in the NGR and AER guidelines; and

§ the Revenue and Pricing Principles also provide substantial flexibility as to how cost of provision is to be calculated, and so would leave the scope for the specific risk of an asset being reflected as appropriate in the calculation, and would also leave open

199 For example, the majority of the regulated gas pipelines have had their initial values determined at an estimate of the depreciated optimised replacement cost, and so this could be applied as the default unless there are strong grounds for considering that an alternative valuation method would be more reasonable in the circumstances of the pipeline in question.

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the option of a simplified treatment of taxation in the calculation.200

5.1.3 Pricing principles for derivative and ancillary services

While the options discussed in the preceding section could be used to assess the reasonableness of the prices for firm transportation services, there may also be value in specifying the principles to be used to determine the prices of:

§ derivative services, which are services that use the pipeline, but are different in nature (for example, pipeline storage and backhaul services) and may be priced as a multiple of, or discount to, the firm transportation service; and

§ ancillary services, which are services that would be provided through separately identifiable assets or activities.

In relation to derivative services, it is understood that the prevailing practice is to commence with the firm transportation charge, and then transform this into a price for the derivative service, taking account of how the derivative service affects cost and capacity (revenue). A further constraint is then applied that the price be consistent with the shipper making a reasonable contribution to the pipeline.

This would imply, for example, that the price for backhaul may still reflect a proportion of the forward-haul price as the service, because while backhaul services may relieve capacity and reduce operating expenses, it is only possible because of the existence of the pipeline. It would be appropriate if further guidance is to be provided simply to elevate this practice into a guiding principle for the arbitrator. The statement of the principle could be as follows:

The adjustment applied to derive the price for a derivative service should:

§ take account of opportunity cost / benefit of the derivative service relative to the main pipeline service, having regard to any effect on cost and / or capacity, and

§ be consistent with the derivative service delivering a reasonable contribution to joint and common costs.

A relevant precedent for this approach is the arrangement for negotiated transmission services in electricity.201

200 It is noted that the recently established price monitoring regime for the Port of Melbourne requires a pre tax WACC to be applied in all calculations, and hence provides a more simplified treatment of taxation. Similarly, the key measure of profit the ACCC reports in relation to the major Australian airports is the before tax return on assets, which is a similar simplified treatment (i.e. the relevant point of comparison for the return is the pre tax WACC).

201 Specifically, clause 6A.9.1(3) provides that for services that exceed the network performance requirements that the differential in price for that service, relative to the standard shared transmission service, should reflect the increase in the transmission business’ incremental cost of providing that service. In the case of the derivative services provided by pipelines, the incremental cost could include any lost revenue through capacity reductions required to provide the service as well as any direct cost.

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In relation to ancillary services, it would be reasonable for the prices for these services to reflect the attributable cost of provision. Shippers have emphasised the fact that these services contribute only a small proportion of overall revenue, and so requiring prices to reflect cost would not be expected to have a material adverse commercial effect on the pipelines, or risk deterring efficient new investment. In addition, as any party seeking an ancillary service ordinarily would already be a customer of the pipeline for some form of transportation. There is therefore no obvious reason to seek to recover a share of joint and common costs from these services.

5.2 Other relevant principles

In addition to pricing principles, it may be necessary to include other principles in the Rules to guide the arbitrator when making its determination about the price or non-price terms and conditions of access and other disputes.

One issue that must be considered in this context is whether the arbitrator should be given a broad range of other principles to consider, or a more targeted set of principles. The problem with a broad set of principles is that it may undermine the intent to provide for expeditious dispute resolution, which is key to the arbitration providing a credible threat during the negotiation process. This is because the more factors an arbitrator is required to consider the more complex the decision making becomes, with consequential impacts on timeliness of decision making, and the potential for disputes regarding the weighting and interpretation to be placed on the guidance.

In the GMRG’s view, timely outcomes are likely to be facilitated by targeted principles with a commercial focus rather than open-ended considerations that provide little guidance to a decision-maker. However, the more constrained the principles that can be taken into account by the arbitrator, the closer the arbitration is likely to be to providing a regulatory outcome, something that is not intended by this mechanism or desired by pipeline operators or shippers.

Another factor that has to be considered in this context is that specifying guiding principles may encourage pipeline operators to reach negotiated outcomes that are in accordance with those principles. In practice, recourse to arbitration would likely not be required, but as highlight by the AER ‘the guiding principles would still have an important role to play, particularly if the objective of the new mechanism is to achieve more efficient pricing outcomes than those that would be likely to arise in a commercial negotiation between a party who has market power and a party which does not’.202

It is with this in mind that the GMRG has considered whether the pricing principles should be supplemented by any other principles.

In other access regimes, including state and territory access regimes for rail, ports and other infrastructure, the principles the arbitrator is required to have regard to 202 AER, February 2017, submission to the National Gas (South Australia) (Pipeline Access-

Arbitration) Amendment Bill 2017, p. 3.

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largely mirror the principles in the original Competition Principles Agreement (CPA),203,204 which required regard to be had to:

§ the owner’s legitimate business interests and investment in the facility;

§ the costs to the owner of providing access, including any costs of extending the facility but not costs associated with losses arising from increased competition in upstream or downstream markets;

§ the economic value to the owner of any additional investment that the person seeking access or the owner has agreed to undertake;

§ the interests of all persons holding contracts for use of the facility;

§ firm and binding contractual obligations of the owner or other persons (or both) already using the facility;

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

§ the economically efficient operation of the facility; and

§ the benefit to the public from having competitive markets.

This list of principles that a dispute resolution body should be required to take into account has recently been amended through the Intergovernmental Agreement on Competition and Productivity – Enhancing Reforms (Intergovernmental Agreement).205 The list of principles now includes:

(i) the objective of the access regime principles, which is to promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets;

(ii) the legitimate business interests of the provider, and the provider’s investment in the facility;

(iii) the public interest, including the public interest in having competition in markets (whether or not in Australia);

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

(v) the direct costs of providing access to the service;

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

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

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

(ix) the economically efficient operation of the facility;203 A similar set of principles was also reflected in the Gas Code, which was in effect between

1997 and 2007.204 COAG, 1995, Competition Principles Agreement.205 COAG, Intergovernmental Agreement on Competition and Productivity – Enhancing

Reforms, Appendix C.1: Access to Services Provided by Means of Significant Infrastructure Facilities, December 2016.

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(x) the pricing principles;

(xi) other matters the body determines are relevant.

These principles are reflected in the factors the ACCC is required to take into account when making a final arbitration determination under Part IIIA of the CCA.

In the GMRG’s view, the principles set out in the Intergovernmental Agreement, provides a good starting point for the other principles that an arbitrator could be required to have regard to under the new arbitration mechanism. However, some refinements would be required to:

§ ensure the principles are commercially focused by removing the efficiency and competition related principles in (i), (iii) and (ix);

§ remove any duplication between the pricing principles, by removing the (v) and (x); and

§ avoid conferring an unnecessarily broad discretion on the arbitrator by removing (xi).

Further, the arbitrator may also be required to take into account competition for the provision of services, which may provide another important input into the assessment of whether the offer is reasonable. The GMRG is of the view it would be more appropriate for the arbitrator to take this factor into account when making its decision, rather than using it as a basis to determine whether or not to proceed with the arbitration. This is similar to the approach taken by the AustralAsia Railway (Third Party Access),Code, which allows the arbitrator to take into account competition from road transportation when setting the price of services that are subject to competition from this source.206,207

If the refinements outlined above are made, the set of other principles that the arbitrator could be required to have regard to would include:





206 AustralAsia Railway (Third Party Access) Code, Schedule 1.207 Under this regime, the access principles provide for the access price payable to be

determined by the arbitrator depending upon whether there is a sustainable competitive price or no sustainable competitive price. In determining which category the access price falls within the arbitrator must consider whether the availability or potential availability of modes of transport other than the railway is an effective constraint on the price of transporting such freight on the railway, having regard to a broad range of matters such as the number and size of participants in the market, the type and volume or freight involved, the extent of product differentiation in the market, contractual terms and dynamic characteristics of the market.See Schedule 1, clause 1(2)(b).

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In addition to the principles outlined above, a number of safeguards could be included in the Rules to ensure pipeline operators cannot be required to carry out an augmentation to the pipeline unless the shipper funds the augmentation in its entirety, and it is technically and economically feasible and consistent with the safe and reliable operation of the pipeline (see section 4.4.1.3).

5.3 Options for pricing principles and other principles

Drawing on the material set out above, the GMRG has identified the following options for the pricing principles:

§ Option 1: Pricing principles to provide the arbitrator with broad discretion supplemented by the other principles set out at the end of section 5.2.

§ Option 2: Pricing principles to specify the test to be used by the arbitrator when assessing the reasonableness of the offer, with the sub-options being that the arbitrator is required to test the reasonableness of the offer by comparing it with:

a. the prices payable for comparable pipeline services; or

b. the actual costs (including a commercial rate of return) the pipeline operator incurs in providing the service.

These pricing principles would be supplemented by the other principles set out at the end of section 5.2.

§ Option 3: Option 2 plus further guidance in the pricing principles on how the test is to be applied. These pricing principles would be supplemented by the other principles set out at the end of section 5.2.

5.3.1 Option 1: Broad discretion in pricing principles supplemented by other principles

Under this option the arbitrator would be required to consider whether the price offered by the pipeline operator is reasonable, having regard to the principles set out at the end of section 5.2, which include:





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Other than these factors, the arbitrator would not be provided with any guidance or constraints upon its decision.

While this option would be flexible enough to deal with a range of disputes, it is unlikely to result the timely resolution of price related disputes because a key issue that parties would raise is the basis upon which the reasonableness of a price should be tested, which would take some time to resolve. The other problem with this option is that it would provide little certainty as to the outcome of an arbitration, or guidance on how prices would be expected to be set through commercial negotiations, which could adversely affect the negotiation process.

5.3.2 Option 2a: Pricing principles based on prices payable for comparable pipeline services supplemented by other principles

Under this option, the pricing principles would require the arbitrator to assess the reasonableness of the offer by comparing it with the prices payable for comparable pipeline services and it would be left to the arbitrator to determine how to carry out the assessment. The pricing principles would also set out the principles for determining the price of derivative and ancillary services, which 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 main advantage of this option is that the arbitrator would be able to have recourse to readily available information on the prices charged for comparable services, which should be more straightforward than a cost of service based approach and therefore facilitate a more timely resolution of the dispute.

There are, however, a number of shortcomings with this option, with the main one being that it is predicated on an assumption that the prices charged for comparable services by either the pipeline in question or other pipelines are free of monopoly pricing. Given the views expressed by shippers and the ACCC’s findings, this assumption would be difficult to substantiate. The other problem with this option is that it will require a number of adjustments to be made to the prices paid by other shippers to account for differences between the service that is sought by the shipper and the services that other shippers are receiving. While in some cases this may be relatively straightforward, in other cases it may not be feasible to make the adjustments, so the robustness of the comparison may be questionable.

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

Under this option, the pricing principles would require the arbitrator to assess the reasonableness of the offer by comparing it with the costs the pipeline operator

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actually incurs in providing the service (including a commercial rate of return)208 and it would be left to the arbitrator to determine how to carry out the assessment. In a similar manner to Option 2a, 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 arbitrator would also be required to take into account the list of other principles set out at the end of section 5.2.

The main advantage of this option is that it does not require an assumption to be made about whether the prices charged by other pipelines, or the pipeline itself, have been affected by the exercise of market power. It is also consistent with the approach that shippers expect the arbitrator to take and the approach taken in other commercial settings and access regimes.

There are, however, a number of shortcomings with this approach, with the main one being that it may take some time to establish what the cost of service provision is, with a key area of dispute likely to be the value to ascribe to the pipeline. Another problem with this approach is that it requires sufficient information to be made available to the arbitrator to estimate the cost of service provision. It is therefore expected to be more resource intensive than Option 2a.

5.3.4 Option 3a: Option 2a with further guidance in the pricing principles

This option is identical to Option 2a, but the pricing principles would provide the arbitrator with further guidance on how to carry out the comparison with the prices payable for comparable services. The pricing principles could, for example, require the comparison to be based on:

§ the prices charged for other pipelines, adjusted to reflect a set of specified factors, or

§ the pre-existing prices for the pipeline in question (for example, a 12 month volume weighted average), adjusted to reflect any differences in service.

While this option may reduce some of the potential sources of dispute that could otherwise arise under Option 2a, it does not address any of the other shortcomings identified with this option.

208 The commercial rate of return should be commensurate with the conditions in financial markets and the risks involved in providing the service

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5.3.5 Option 3b: Option 2b with further guidance in the pricing principles

This option is identical to Option 2b, but the pricing principles would provide the arbitrator with further guidance on how to calculate the actual cost of service provision and, in particular, how to value the assets and to determine the value of other key inputs, including the rate of return to be earned by the pipeline operator. The pricing principles could also be supplemented by a guideline prepared by the AER on asset valuation techniques.

An issue that arises with this option and Option 3a is the extent to which further guidance is to be included in the pricing principles. The most material issue that has been identified in this regard is the extent of further guidance that is provided in relation to setting the initial asset value if prices are to be assessed against the cost of provision. Unlike the other matters the arbitrator may be called upon to address, the objective for the initial asset value is much less obvious and likely (for some pipelines at least) to be a point of material dispute.

The main advantage of this option is that it will reduce some of the potential sources of dispute that could otherwise arise under Option 2b and provide for a more timely resolution of disputes. More prescription could, however, limit the flexibility the arbitrator has to deal with the specific circumstances of the pipeline and the parties.

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6. Preliminary views on options and transitional arrangements

Having regard to the overarching objective of the new information disclosure and arbitration framework (see section 2.2), this chapter outlines the GMRG’s preliminary views on:

1. the package of options that should be implemented in relation to information disclosure, the arbitration mechanism and the arbitration principles; and

2. the transitional arrangements that may be required if these options are implemented.

The GMRG’s preliminary views are provided for consultation purposes only and to assist stakeholders to respond to this paper. These views should not therefore be interpreted as concluded positions of the GMRG.

6.1 Preliminary views on options

Table 6.1 sets out the options identified in chapters 3-5, while Table 6.14 sets out the GMRG’s preliminary view on the options that should be implemented.

Table 6.13: Design optionsOption Description

Information DisclosureOption 1 Disclosure of a base level of information shippers require when considering whether to

seek access but no additional information to inform their assessment of the reasonableness of prices.

Option 2 Option 1 and financial reporting

Option 3 Option 2 and detailed cost information

Option 4 Option 2 and price reporting

Option 5 Option 3 and price reporting

Arbitration MechanismOption 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 principles

Option 2a Pricing principles based on price payable for comparable pipeline services supplemented by other principles (including principles on how the prices of derivative and ancillary services should be determined).

Option 2b Pricing principles based on the actual cost of service provision (including a commercial rate of return) supplemented by other principles (including principles on how the prices of derivative and ancillary services should be determined).

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Option Description

Option 3a Option 2a with further guidance in pricing principles on how the assessment of the reasonableness of the offer is to be carried out.

Option 3b Option 2b with further guidance in pricing principles on how the assessment of the reasonableness of the offer is to be carried out.

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Table 6.14: GMRG’s preliminary views on option selectionInformation disclosure and arbitration framework

Overarching objective

To facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines by: reducing the imbalance in bargaining power that shippers can face; and pose a constraint on the exercise of market power by pipeline operators.

Outcomes sought

§ Provide parties with an incentive to reach agreement through commercial negotiations and to only have recourse to the arbitration mechanism if there is a dispute that cannot be resolved through commercial negotiation.



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. 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. The arbitrator should also have guidance on the matters to be taken into account when making its decision, including pricing and other principles.

Preferred option

Option 2: Option 1 plus financial and demand information (see section 3.4.2)

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

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

2. Verified financial information 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.

Option 3: Conventional Arbitration with enhanced procedural protections and partial transparency (see section 4.5.3)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 (see section 5.3.3)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 principles that the arbitrator would be required to take into account (see end of section 5.2).

Implementation issues

Guideline: To specify how the financial statements are to be prepared, information to be disclosed and any principles employed. The guideline will specify the level of detail required in the notes to the financial statements regarding matters such as asset valuation,

Information gathering power: To the extent the arbitrator believes it does not have sufficient information made available by the pipeline operator (via the financial statements required or voluntarily provided), to apply the pricing principles, the arbitrator should have the power to obtain this information. AER guides: Two guides to be prepared, with one to provide the arbitrator with guidance on the

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depreciation allowances, costs and cost allocation methodology.

requirements of the arbitration, including key procedural requirements, timeframes the determination form. The second would provide disputing parties with guidance on the process.

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As Table 6.14 highlights, the GMRG’s preliminary view is that the following package of options would be most likely to facilitate timely and effective commercial negotiations between shippers and the operators of non-scheme pipelines:

§ Information disclosure: Option 2 – Disclosure of base level of information shippers require when considering whether to seek access and publication of financial statements that shippers can use to assess the reasonableness of the offer.

§ Arbitration mechanism: Option 3 - Conventional Arbitration with enhanced procedural protections and partial transparency.

§ Arbitration principles: Option 2b - Pricing principles based on actual cost of service provision (including a commercial rate of return) supplemented by a number of other principles (including principles on how the prices of derivative and ancillary services should be determined).

In reaching this view, the GMRG has considered whether the assessment of the reasonableness of a pipeline operator’s offer could be carried out having regard to:

§ the prices charged by the pipeline or other pipelines for comparable services; or

§ the costs the pipeline operator incurs (including a commercial return) in providing the service.

While the first of these options may be less resource intensive than the second, the fact that 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. The GMRG is therefore of the view that the most appropriate basis for testing whether the price offered by a pipeline operator is reasonable is to have regard to the costs the pipeline operator incurs in providing the service.

This view is consistent with the view that shippers expressed during the Examination and the ACCC expressed in its Inquiry, which is that to assess the reasonableness of an offer and readily identify any attempted exercise of market power, shippers need to be able to assess whether the prices are cost reflective. It is also consistent with the view expressed in the second reading speech for the NGL, which is that:209

‘…customers can only negotiate with service providers when they have adequate information to determine whether or not payments required of them accurately reflect the efficient cost of providing the service.’

To enable the prices offered by pipeline operators to be compared with the cost of service provision, the new information disclosure and arbitration framework will need to provide for:

§ the disclosure of some cost-based information to shippers to enable this form of assessment to be carried out during the negotiations, which reduces the list of potential options from five to two (options 2 and 3). Of the remaining two options, Option 2 is

209 South Australian Hansard 2008, National Gas (South Australia) Bill 2008, Legislative Assembly, 9 April 2008, p. 2890

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expected to be more cost effective than Option 3 when regard is had to the costs that pipeline operators are likely to incur and the reductions in information asymmetry that are likely to occur under the two options. The GMRG’s preliminary view is therefore that Option 2 should be implemented.

§ The arbitrator to have regard to the actual costs incurred by the pipeline operator (including a commercial rate of return) when making its determination about the reasonableness of an offer, which reduces the list of potential options from five to two (i.e. options 2b and 3b). Of the remaining two options, Option 2b is expected to provide the arbitrator with a clear direction on how the reasonableness of prices are to be assessed, without unnecessarily constraining the way in which the assessment is carried out by prescribing the use of a particular approach. The GMRG’s preliminary view is therefore that Option 2b should be implemented.

The financial statements that pipeline operators would be required to publish if information disclosure Option 2 is implemented, will be an important input to the commercial negotiation process. It will also have a role to play in the arbitration process, although it is possible that the information contained in the financial statements may not be sufficient to enable the arbitrator to apply the pricing principles. For example, if the dispute relates to an augmentation, then historic financial statements may not provide the arbitrator with the cost information it requires to apply the pricing principles. To overcome this issue, the GMRG suggests that an information gathering power be included in the Rules that could be called upon by the arbitrator if it requires additional information when making its determination.210

In terms of the form of the arbitration mechanism, the GMRG is of the view that the conventional arbitration with enhanced procedural protections and partial transparency appropriately balances the need to provide a commercially-focused arbitration mechanism while also addressing the potential for such a mechanism to be gamed or to adversely affect investment.

The GMRG is also of the view that the arbitrator should be permitted to seek administrative or technical support from the AER in undertaking the arbitration. This recognises that the AER has administrative oversight of the arbitration mechanism as well as relevant experience and expertise in the gas pipeline sector. This should help facilitate the arbitration being completed within the three month timeframe envisioned.

In the GMRG’s view, the package of options outlined above will:

§ be fit for purpose, targeted and proportionate to the imbalance in bargaining power that it is intended to address and not to impose an excessive burden on non-scheme pipeline operators;211

§ result in the most appropriate allocation of investment risks and accountability;212 and

210 In advance of the initial financial reports being published, which will follow sometime after the arbitration mechanism commencing, this information gathering power will be vital in ensuring the pipeline operator provides the arbitrator with any financial and cost information it requires.

211 For example, by selecting the most cost-effective information disclosure option.

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§ provide pipeline operators and shippers with sufficient clarity about how the new framework will operate, while also ensuring there is sufficient flexibility in the new arrangements to deal with any changes that may occur in the future.213

The GMRG also expects the package of options to promote the NGO in a more cost-effective and targeted manner than any of the other options set out in this paper and to make a greater contribution to the Council’s Vision and the next phase of gas market reforms.

Further detail on why the GMRG has reached this preliminary view is provided below.

Before moving on though, it is worth noting that before making a final recommendation to Council officials on the design of the new framework, the GMRG will be hosting a number of roundtable discussions and will be seeking written submissions on the options presented in this paper. The feedback provided by stakeholders through these forums will be an important input into the development of the final recommendation, which will be evaluated using the assessment framework set out in section 2.3.

6.1.1 Information disclosure requirements

The GMRG’s preliminary view is that Option 2 should be implemented, which will provide for the publication of:

§ the base level of information that shippers require when considering whether to seek access to a pipeline; and

§ the pipeline’s financial reports and demand information, which shippers can use to assess the reasonableness of prices offered.

Further detail on this option is provided in Table 6.15.

212 For example, by not allowing an arbitrator to direct the pipeline operator to augment the pipeline unless the augmentation is to be underwritten by the shipper.

213 For example, by specifying the use of the actual cost standard in the pricing principles but not prescribing how this standard is to be applied.

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Table 6.15: Information disclosure Option 2

Design Preliminary view

Information to be disclosed to enable shippers to assess whether to seek access

Non-scheme pipeline operators should be required to disclose the following information on their website§ Information on the range of services offered by the pipeline.§ Information on the availability of the services offered by the pipeline. § The standing offers 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; – the methodology used by the pipeline operator to calculate the price of each

of the services listed in (a); and– any other policies the pipeline operator employs that may affect a shipper’s

access to, or use of, the pipeline.§ 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.§ The negotiation framework that will apply if the shipper is to request access,

which amongst other things, should set out the process a shipper is to follow if it wants to request access, indicative timeframes for the negotiations and the ability of the parties to have recourse to the commercial arbitration framework.

Information to be disclosed to enable shippers to assess the reasonableness of the offer

Non-scheme pipeline operators to publish verified financial information for each pipeline. The financial information would need to be prepared in accordance with relevant Australian Accounting Standards and any guideline prepared under the NGR. The financial reports would include:§ 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, 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. The notes will also be required to include reporting of expenses/costs at a level of disaggregation sufficient to meet the needs of parties, as well as information on cost-allocation methodologies.

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Design Preliminary view

Implementation Issues

Exemption Framework An exemption framework should be included in the NGR and provide for the AER to grant:§ an exemption from all the disclosure requirements 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 will be required to notify the AER and the exemption will be extinguished.

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 and demand information on an annual basis within four months of the end of the pipeline’s financial year.

Confidentiality mechanism Given the proposed option does not involve the disclosure of prices, there does not appear to be a need to include a confidentiality mechanism.

Costs Pipeline operators should be able to recover the direct costs of carrying out any investigations that might reasonably be required when considering whether an access request can be met.

The reasons for selecting this option are three-fold.

First, the information that would be provided under this option would allow shippers to make an informed decision about whether to seek access and to carry out a high-level assessment of whether the price actually offered by the pipeline operator is cost reflective. The information asymmetries that shippers currently face would therefore be substantially reduced under this option, which should, in turn, facilitate more timely and effective negotiations and minimise the risk of a dispute.

Second, if the benefits of the reduction in information asymmetry are taken into account, then this option can be viewed as the most cost-effective of the five options. That is, while the costs are higher in absolute terms than what they would be under Option 1, the disclosure of financial reports and demand information is expected to substantially strengthen the bargaining position of shippers and impose greater discipline on pipeline operators when setting prices relative to Option 1. While further reductions in information

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asymmetry could be achieved under Options 3-5, in the GMRG’s view the incremental benefits of these options are unlikely to exceed the costs.

Third, the option is consistent with the GMRG’s preliminary view that the pricing principles should require the arbitrator to compare the price offered with the actual cost of service provision. While the adoption of this test could also support the selection of Option 3, the costs associated with publishing detailed cost information on an annual basis are likely to be significant. The GMRG’s preference at this stage is therefore Option 2.

6.1.2 Arbitration mechanism

The GMRG’s preliminary view is that Option 3 should be implemented, which will provide for conventional arbitration with enhanced procedural protections and partial transparency.

As outlined in Chapter 5, the design of the arbitration mechanism consists of various components. The framework associated with many of these components are outlined in the draft Amendment Bill and reflect the indicative characteristics of the arbitration mechanism outlined by the Examination. The GMRG has proposed approaches to deal with the implementation of particular design components in the initial Rules. These proposed approaches are intended to apply regardless of which arbitration option is implemented and it is important to understand how these proposals will interact with the option selected. A summary of the proposed approaches presented in Chapter 5 is provided in Table 6.16.

Table 6.16: Summary of proposed approaches for the arbitration mechanismDesign component

Proposed approach

Access proposals

The Rules to require an access request to be made in writing and in accordance with the negotiation framework of the operator of the non-scheme pipeline in which the access is sought.

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

§ consistent with rule 118(3) of the NGR, 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.

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Design component

Proposed approach

Oversight by the AER

The AER is to provide oversight and administration of the arbitration framework in accordance with the final Amendment Bill.

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 or resource tool 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. The information could take the form of a handbook.

Selection of the arbitrator

1. The AER should be required under the Rules to 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 a maximum of 15 business days from when the AER is notified of an access dispute.

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 the parties, make a fresh appointment within 5 days of being notified of the need for the fresh appointment.

Binding nature 1. Parties wishing to vary an arbitration agreement should be required under the Rules to apply to the AER in writing identifying the variation sought 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.

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.

Costs 1. Provision should be made in the Rules for parties to agree otherwise to the splitting of costs, or for the arbitrator to apportion the arbitration costs (costs of the arbitrator and process) in specified circumstances, taking into account matters such as: the financial circumstances of the parties; the value of services sought; the negotiating and arbitration behaviour of parties; the likely flow on effects, if any, of the determination on other market participants; 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 the expert advice in advance of obtaining expert advice.

3. The AER should have the ability to, but is not required to, fix or cap the fee to be paid to an arbitrator for the costs of, and the services provided by, the arbitrator.

Types of services in dispute

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.

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Design component

Proposed approach

Exemption framework

The Rules should provide for an exemption to be granted to non-scheme pipelines that do not provide third party access. However, if pipeline services do become available for third parties the exemption should expire.

Termination of arbitration

1. Rules to provide the arbitrator 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, under the Rules, consult with the parties and may consult with the AER on the appropriateness of alternative means of resolution.

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

Correction of errors

The Rules should stipulate that:§ If an access determination is found by a party to the arbitration, the arbitrator

responsible for the determination or the AER 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 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.

In terms of the options presented in Chapter 5, Option 3, when combined with the cost based information disclosure and arbitration principles options, appropriately balances the need to provide an arbitration mechanism that has adequate safeguards to avoid distorting investment and provides procedural protections to ensure it is not gamed by the parties with the most resources.

The GMRG is of the view that one of the major risks associated with conventional arbitration is that parties can game the process, meaning that disputes are not resolved in a timely and cost-effective manner. Option 3 attempts to overcome this risk by requiring, at the commencement of the arbitration, the arbitrator to specify a strict cut-off date and time for provision of information. Under the NGR, the arbitrator would also have the power to, and must consider, limiting the amount of documentation that can be provided by parties. Further, the arbitrator could choose to focus parties on the key issues by providing a list of questions for the parties to address. While the arbitrator would retain the flexibility to make these decisions, these procedural requirements may help to minimise the costs and should reduce the ability of parties to game the arbitration process.

The GMRG is of the view that the arbitrator should be permitted to seek administrative or technical support from the AER in undertaking the arbitration. This recognises that the AER has administrative oversight of the arbitration mechanism as well as relevant experience and expertise in the gas pipeline sector. This should help facilitate the arbitration being completed within the three month timeframe envisioned. To ensure the provision of support from the AER does not undermine the independence of the arbitrator, the nature of assistance could be specifically limited in the Rules to administrative matters and/or assisting the arbitrator understand and utilise the guide developed to assist the arbitrator.

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The reputational harm that may arise as a result of publishing information on the existence of the arbitration should further incentivise commercial agreements. The publication of arbitrators that have conducted arbitrations in relation to non-scheme pipelines may also assist others in selecting an arbitrator with relevant experience.

Finally, it is worth noting that while the GMRG originally thought there would be value in utilising the FOA, it is not clear that the advantages associated with this type of arbitration would outweigh the disadvantages when applied in this these circumstances. Even in Canada where it is available in relation to transportation, there is provision for multiple forms of arbitration to resolve different types of disputes. This provides shippers with the flexibility to choose to use FOA or other forms of arbitration. Providing for multiple forms of arbitration in relation to non-scheme pipelines under the NGL would be highly complex. The GMRG is also cautious of applying an arbitration mechanism that not been applied and tested in Australia. Not only would parties be unfamiliar with how FOA works, but arbitrators would also be unfamiliar with undertaking this type of arbitration. The uncertainty associated with FOA may mean that parties are reluctant to seek arbitration or alternatively, not understand the risks of using FOA and be incentivised to go to arbitration.

6.1.3 Arbitration principles

The GMRG’s preliminary view is Option 2b should be implemented. Under this option, if the dispute relates to price, the arbitrator would be required to assess the reasonableness of the price offered by the pipeline operator by comparing the offer with the costs the pipeline operator actually incurs in providing the service (including a commercial rate of return), but it would be up to the arbitrator to determine how to carry out the test. The pricing principles would also specify that the prices of derivative and ancillary services, are to be based on the opportunity cost / benefit and, in the case of derivative services, delivering a reasonable contribution to joint and common costs.

In addition to the pricing principles, the arbitrator would be required to take into account:







In addition to the principles outlined above, the GMRG proposes to include a number of safeguards in the Rules to ensure pipeline operators cannot be required to carry out an

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augmentation to the pipeline unless the shipper funds the augmentation in its entirety, and it is technically and economically feasible and consistent with the safe and reliable operation of the pipeline (see section 4.4.1.3).

As outlined above, in the GMRG’s view, the most appropriate basis for testing the reasonableness of price is to test that price against the actual cost of providing the service (including a commercial rate of return) rather than the prices paid for comparable services. While the GMRG is aware that this option may not eliminate all of the potential disputes about the methodology that should be used to assess the reasonableness of actual costs, it does not consider it necessary to provide the arbitrator with additional guidance in the pricing principles. To provide detailed guidance to the arbitrator in determining actual costs would risk the application of regulatory outcomes by an independent arbitrator.

It is worth noting in this context that if the arbitrator requires some assistance when considering how the actual cost standard should be applied, or how particular inputs should be measured (for example, asset valuation), then it could seek the assistance of either the AER or another expert in this field. It could also have recourse to the substantial amount of publicly available information on the methods that regulators and other parties use to measure the cost of service and inputs into this calculation.

The conclusion that the test of the reasonableness of price should be based upon an assessment of actual costs is consistent with the approach used in commercial negotiations and the arbitration mechanisms used in a large number of other access regimes. The principles in the vast majority arbitration mechanisms reviewed (and summarised in Appendix E) all either permit or require the arbitration to consider cost of provision when determining an access price.

6.2 Transitional issues

Reflecting Council’s decision that the new framework should be in place as soon as possible, the initial Rules are intended to be developed by mid-July and to be effective as soon as possible thereafter.214

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 guideline on the preparation of financial reports; and

(b) an arbitration process guide or guides for the arbitrator on the arbitration process; and for disputing parties.

214 The initial Rules for the new framework will be made by the South Australian Minister.

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If the initial Rules are assumed to be in effect from 1 August 2017, pipeline operators should be in a position to publish the information set out in (1) on their websites by 1 January 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.

Rather than delaying the commencement of the arbitration mechanism until financial information is available, the GMRG suggests that:

§ the mechanism come into effect at the same time pipeline operators are expected to publish the base level information required by shippers (i.e. 1 January 2018); and

§ the arbitrator be provided with an information gathering power to require the pipeline operator to provide the arbitrator with any financial and cost information it requires.215.

A transitional arrangement may also be required to deal with disputes that commenced before the new framework comes into effect to waive the requirement for shippers to comply with the request for access provisions in the negotiation framework, which may not have been in place when they first sought access.

In terms of the timing of the AER’s guides for the arbitrator and disputing parties, this would ideally be in place in before 1 January 2018. However, if this timing is not feasible due to consultation periods, then as an interim measure the AER should publish a brief outline of the process and how parties can trigger a dispute on its website and provide any guidance the arbitrator requires.

The table below provides a summary of the proposed timelines for the implementation of the new framework.

As this table highlights, the commencement date for financial reporting by pipeline operators is inextricably linked to the publication of the financial reports guideline. If it is assumed that the AER is responsible for developing the guideline it could take nine months to prepare the guidelines under the standard consultation procedures in the NGR. If it is also assumed that pipeline operators are provided a further two months to amend their reporting systems, then they are unlikely to be in a position to start collecting the information until 1 July 2018. The first annual report would not therefore be published until October 2019. While it is possible that as a transitional arrangement pipeline operators could be required to publish an initial half-yearly report, this information would only likely be available in April 2019, which is 21 months after the new Rules are expected to be implemented.

215 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.

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In the GMRG’s view, the disclosure of some cost-based information is required sooner than April 2019 to enable shippers to assess the reasonableness of prices offered and to ensure the arbitrator has regard to costs in making his or her determination. 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 guidelines 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.

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 guidelines. The AER could then take into account the information published in drafting the final guidelines.

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. The GMRG’s preliminary view is therefore that the first option should be pursued. If this option is implemented, then it is possible that financial reporting could commence as early as 30 October 2018.

Table 6.17: Proposed time lines for implementation of the new framework

Date Process1 August 2017 § New Rules come into effect.

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

§ AER commences work on the arbitration process guides.1 January 2018 § Pipeline operators publish minimum information required by shippers on

their websites.§ AER publishes its arbitration process guide for the arbitrator and

disputing parties (or as an interim measure publishes information on the process on its website).

§ Arbitration mechanism commences. 30 October 2018 § Pipeline operators publish first half yearly financial reports (for the

period 1 January 2018 – 30 June 2018).30 October 2019 § Pipeline operators publish first full year financial reports (1 July 2018 –

30 June 2019).

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7. Feedback soughtThe GMRG is interested in obtaining stakeholder feedback on the information disclosure and arbitration framework design, including the proposed approaches and implementation options presented. A list of some of the specific questions that the GMRG would like to get further feedback on is provided below.

7.1 Information disclosure

Options

(1) Are there any other information disclosure options that you think should be considered? If so, what is the option and why do you think it should be considered?

(2) Do you agree with the base level of information that pipeline operators would be required to provide if Option 1 was to be implemented, or is there other information you think should be disclosed to enable shippers to make an informed decision about whether to seek access?

(3) Do you think there is value in requiring pipeline operators to provide shippers with information that could assist with their assessment of the reasonableness of the prices offered?

(a) If not, why not?

(b) If so:

(i) Do you think that cost and other financial information should be reported?

If not, why not?

If so, do you think it is sufficient for shippers to be able to access the pipeline’s financial reports and a breakdown of demand information, or is more detailed cost, demand and financial information required?

(ii) Do you think the prices actually payable by shippers should be reported?

If not, why not?

If so, do you think the anonymity of shippers needs to be protected, or do you think all prices should be disclosed?

— If you think anonymity needs to be protected, please explain why and how you think prices could be aggregated?

— Given the differences in terms and conditions that can affect price in the underlying contracts, do you have any concerns about aggregating prices?

(iii) Is there any other information that pipeline operators could be required to disclose?

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Implementation issues

(4) Do you think that an exemption mechanism should be incorporated into the information disclosure requirements?


(b) If so:

(i) Do you agree that it would be appropriate to provide for an exemption from all the disclosure requirements if the pipeline is not providing third party access; or is a single shipper pipeline?

(ii) Do you think an exemption from the cost, demand and financial information reporting requirements should be granted to pipelines that are smaller than the minimum reporting threshold? If so:

Do you think the exemption should be absolute, or should it just mean that the pipeline operator doesn’t have to provide information unless it is requested to do so?

Do you agree with the 10 TJ/day reporting threshold, or do you think a different threshold would be more appropriate?

(iii) Do you think there are any other exemptions that should be provided for, such as in relation to:

– non-scheme distribution pipelines?

– pipelines subject to a 15-year no-coverage determination?

(c) If an exemption mechanism is to be adopted, do you think the AER is the most appropriate body to oversee the mechanism, or is there another option?

(5) Do you agree that the new information disclosure requirements should be classified as a civil penalty provision in the NGR? If not, why not?

(6) Do you think there would be any value in also classifying the information disclosure requirements as a conduct provision in the NGR?216 If so, why?

(7) Do you think there would be value in including a reporting standard in the information disclosure requirements in the NGR?


(b) If so, what form do you think it should take?

(8) Do you agree that the information to be published by pipeline operators should be published on their website?


216 A conduct provision allows persons other than the AER that suffer loss or damage as a result of the conduct of another person that was done in breach of a conduct provision to recover the amount of the loss or damage by action against that person in court.

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(b) Are there any other issues that the GMRG should consider in relation to the manner and form in which information should be published?

(9) Do you agree that the AER should prepare a guideline on how financial reports or detailed cost information is to be prepared? If not, why not?

(10) Do you have an alternative view on the frequency with which information should be published by pipeline operators from that set out in section 3.4.6.3?

(11) Do you think a confidentiality mechanism should be included in the information disclosure requirement?


(b) If so, do you think:

(i) the AER is the appropriate body to oversee any confidentiality claims?

(ii) any specific provisions need to be included in the NGR to guide the AER’s assessment of the confidentiality claim?

(12) If a shipper’s access application reasonably requires further investigation by the pipeline operator, do you think a pipeline operator should be able to recover the direct costs of this investigation work? If not, why not?

(13) Are there any other circumstances in which a pipeline operator should be able to recover the costs it incurs in providing information?

Preliminary view on options

(14) Do you agree with the GRMG’s preliminary view that Option 2 should be implemented? If not, please explain why this is the case and if there is another option that you think would be more appropriate?

(15) What costs are pipeline operators likely to incur complying with this option?

(16) Do you think that the benefits of implementing this option will exceed the costs?

(17) Do you agree with the GMRG’s preliminary view on how the implementation issues should be dealt with (see Table 6.15)? If not, please explain why.

7.2 Arbitration mechanism

Proposed approaches

(18) Do you agree with the GMRG’s proposed approach to dealing with the following matters as set out in sections 4.4.1 and 4.4.3:

(a) access proposals?

(b) protecting existing contractual rights?

(c) safeguards to avoid distorting investment?

(d) the role of the AER?

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(e) selection of the arbitrator?

(f) the binding nature of the access determination?

(g) the costs of the arbitration?

(h) the termination of arbitration by the arbitrator and/or access seeker?

(i) the process for correcting errors?

(19) If not:

(a) What concerns do you have with the proposed approach/s?

(b) Are there other approaches that you think would be more appropriate? If so, please explain why this is the case.

(20) Do you agree with the GMRG’s proposal to allow shippers and pipeline operators to 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 augmentation of the pipeline (excluding extensions)?

(a) If not, what services do you believe should be eligible to go to arbitration and why?

(21) Do you think an exemption mechanism should be incorporated into the arbitration mechanism?


(b) If so, do you agree that it would be appropriate to provide for an exemption to non-scheme pipelines that are not providing third party access? If not, why not?

(c) Are there other exemptions that should be included, such as in relation to:

(i) non-scheme distribution pipelines?

(ii) pipelines subject to a 15-year no-coverage determination?

(22) If an exemption mechanism is to be adopted, do you think the AER is the most appropriate body to oversee the mechanism, or is there another option?

(23) If an exemption is adopted, what process should be in place under the Rules to obtain an exemption? For example, should parties be required to apply to the AER for an exemption?

(24) Are there other important design components that have not been identified in this paper? If so:

(a) What design component/s have been overlooked?

(b) What approach would you recommend the GMRG take in addressing these design issues?

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Arbitration options

(25) Of the options that have been identified, which options do you think provide the most a credible threat on intervention? Why?

(26) Which option do you think appropriately balances the following and why:

o providing for a commercially-focused arbitration framework;

o avoiding unnecessary interference with investment and innovation; and

o affording adequate protections to small shippers to effectively use arbitration in the event of a dispute.

(27) Are there any additional and more preferable options for the implementation of the arbitration mechanism not identified in this paper? If so:

(a) What design components would make up this option or options?

(b) What are the advantages and disadvantages of this option?

(c) Why is this option preferable to the five options identified?

Preliminary view on options

(28) Do you agree with the preliminary view on the form the arbitration mechanism should take?

(a) If not, is there another arbitration option that you think would be more appropriate? If so, please explain why this is the case?

7.3 Arbitration principles

(29) Do you think the pricing principles should:

(a) provide the arbitrator with broad discretion to determine whether a pipeline operator’s offer is reasonable? If so, why?

(b) specify the test the arbitrator is to use when assessing whether a pipeline operator’s offer is reasonable?

(i) If not, why not?

(ii) If so, do you think the test should be based on:

• the prices payable for comparable pipeline services? If so, please explain why and also set out how you think the limitations set out in sections 3.3.2.2 and 5.1.1 would be overcome.

• the costs incurred in the provision of services? If so, do you think the costs should be measured using the hypothetical new entrant standard, or the actual cost standard?

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(c) provide the arbitrator with additional guidance on how to apply the relevant test, or should the arbitrator have discretion to determine how the test is to be applied?

(i) If you think more guidance is required, please explain why and specify what additional guidance should be included in the pricing principles.

(ii) If you don’t think further guidance should be included in the pricing principles, do you think there would be value in getting the AER to prepare any guidelines on how the actual cost of providing the service could be measured by the arbitrator (including asset valuation techniques that could be used)?

(d) include separate principles to deal with derivative and ancillary services?

(i) If not, why not?

(ii) If so, do you think the test should be based on the approach set out in section 5.1.3?

(30) Are there any other pricing principles that you think should be included in the NGR that haven’t been considered?

(31) Do you think the pricing principles should be supplemented with other principles?


(b) If so, do you think the principles set out at the end of section 5.2 are appropriate, or do you think further refinements are required?

Preliminary view on options(32) Do you agree with the GMRG’s preliminary view that the pricing principles should be

based on actual cost of service provision (including a commercial rate of return) supplemented by a broad set of other principles (i.e. Option 2b)? (a) If not, are there other options that you think would be more appropriate? If so,

please explain why this is the case.(b) Should a supplementary factor be included in the pricing principles that allows

an arbitrator to consider the prices struck in foundation contracts for comparable services in those cases where a pipeline has recently been constructed and there was competition for the development of the pipeline?(i) If so, how would the limitations set out in Box 5.1 be overcome?

7.4 Transitional issues(33) Do you agree with the GMRG’s preference to accelerate the development of the

financial guidelines with the assistance of a suitable consulting firm and in consultation with the AER?(a) If not, why not?

(34) Do you think the time lines proposed in Table 6.5 (see section 6.5) are realistic?


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(b) What timeframes do you believe are appropriate in relation to:

(i) pipeline operators publishing the base level information required by shippers on their website?

(ii) the development of a guideline on the preparation of financial reports?

(iii) pipeline operators publishing financial reports?

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Appendix A Regulation of scheme pipelinesA scheme (covered) pipeline may be subject to either full or light regulation.

Full regulation

A pipeline subject to full regulation must periodically submit a ‘full access arrangement’ to the Australian Energy Regulator (AER) (or the Economic Regulatory Authority (ERA) in Western Australia) and obtain its approval for the price and non-price terms and conditions of access to the reference service(s). A full access arrangement must set out:

§ the reference service(s) to be provided by the pipeline and the tariff payable for each reference service (a ‘reference service’ is defined in the NGR as a service that is likely to be sought by a significant portion of the market);

§ the terms and conditions upon which the reference service(s) will be provided; and

§ the pipeline’s queuing policy, capacity trading policy, extensions and expansions policy and terms on which receipt/delivery points may be changed by the shipper.

When assessing the proposed access arrangement, the AER (ERA) is required to have regard to the price and revenue regulation provisions and a range of other provisions in Parts 8-10 of the NGR. These provisions are relatively prescriptive and have as their central focus, economic efficiency. When carrying out its assessment, the AER (ERA) is also required to have regard to the National Gas Objective and the revenue and pricing principles in the NGL, which also have economic efficiency and the long-term interests of natural gas consumers as their focus.

Although AER approval of an access arrangement is required, the pipeline operator and shippers can still negotiate and enter into agreements that differ from the access arrangement. To ensure that shippers have protection in these negotiations, provision has been made in Chapter 6 of the NGL for either party to trigger the dispute resolution mechanism if an access dispute arises. The dispute resolution body is the AER (ERA).

Some other safeguards that have been included in the NGL and NGR to facilitate access and prevent pipeline operators from engaging in conduct that may adversely affect third party access or competition in upstream or downstream markets include:

§ The facilitation of, and request for, access rules in Part 11 of the NGR, which require pipeline operators to make available information a prospective shipper reasonably requires to decide whether to seek access if directed by the AER and to respond to any access requests in a defined period. These rules also prevent bundling of services unless reasonably necessary

§ Provisions in the NGL that state that a pipeline operator must not engage in conduct that prevents or hinders a person’s access to pipeline services, and requires operators to comply with ring-fencing obligations and associate contract provisions.

These safeguards apply equally to pipelines that are subject to full and light regulation.

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Light regulation

This form of regulation is more akin to the negotiate-arbitrate model with greater emphasis placed on commercial negotiation and information disclosure and the AER (ERA) only playing a role if the dispute resolution provisions are triggered. A light regulation pipeline is also prohibited from engaging in inefficient price discrimination or other conduct that may adversely affect access or competition in other markets.

Commercial negotiation and information disclosure are encouraged through a number of provisions in the NGR, which require a pipeline operator to:

§ publish on its website the prices on offer for light regulation services and the other terms and conditions of access to light regulation services on its website;

§ comply with the facilitation of, and request for, access rules in the NGR; and

§ report to the AER (ERA) on access negotiations (at least annually) and set out the results of the negotiations and provide any other information the AER requires.

The AER’s (ERA’s) role under this form of regulation is to monitor the progress of access negotiations and arbitrate any access disputes that may arise.

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Appendix B Dispute resolution clauses standard GTAsPipeline operator: APA Group

Contract name: Gas Transportation Agreement

Applicable to: standard contract available for all APA pipelines

Clause 19: Dispute resolution clause (page 74-5)

(a) If a dispute arises in respect of this Agreement, a Party must not commence legal proceedings in relation to the dispute (except proceedings seeking interlocutory relief) unless and until it complies with the procedures set out in this clause 19.

(b) A Party may refer a dispute for resolution under this clause 19 by written notice to the other Parties (Dispute Notice).

(c) The following representatives of the Parties must promptly meet on a without prejudice basis to endeavour to resolve the dispute:

(i) the Representatives of the Parties set out in the Details (or their nominee), within 10 Business Days of the date of the Dispute Notice; and

(ii) failing resolution under paragraph (i), a more senior representative of each Party, within a further 10 Business Days.

(d) The Parties must act in good faith and use reasonable endeavours to resolve the dispute in all meetings conducted in accordance with paragraph (c).

(e) Paragraph (a) ceases to apply to the dispute if another Party fails to participate in the procedures set out in this clause 19.

(f) Despite the existence of a dispute, the Parties must continue to perform their obligations under this Agreement.

Pipeline operator: JemenaContract name: Gas Transportation Agreement Date: 25 October 2016Applicable to: Eastern Gas PipelineClause 32: Dispute Resolution (page 60-2)32.1 Dispute

(a) A party claiming that a Dispute has arisen must give notice to the other party describing the nature of the Dispute and designating its representative in negotiations.

(b) Any notice of Dispute under this document must be referred in the first instance to a senior representative, who has the necessary authorisation to settle the Dispute, in respect of each of the parties.

(c) If the Dispute is not resolved within ten (10) Business Days of referral to the senior representatives, the parties may agree to refer the Dispute:

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(i) to the Australian Commercial Disputes Centre Limited for mediation in accordance with its rules; or

(ii) to arbitration in accordance with the rules and procedures of any arbitral body that the parties may agree upon, or in accordance with such rules and procedures as the parties may determine from time to time.

(d) If the parties do not agree to refer the Dispute to mediation or arbitration within five (5) Business Days of the expiration of the ten (10) Business Day period referred to in clause 32.1(c), any party may refer the Dispute to an expert (Expert) for expert determination in accordance with clause 32.2.

(e) Any mediation, arbitration or expert determination will be conducted in Melbourne. 32.2 Expert

(a) Where a Dispute under this document is required to be referred to an Expert for resolution, the Expert will be appointed by the parties.

(b) If the parties cannot agree on the Expert to determine the Dispute, the Expert will be an Expert nominated by:

(i) in the case of financial matters, the President for the time being of the Institute of Chartered Accountants;

(ii) in the case of technical engineering matters, the President for the time being of the Institution of Engineers, Australia; and

(iii) in the case of legal matters, the President for the time being of the Law Institute of Victoria.

(c) The parties must: (i) take all reasonable steps to have an Expert appointed promptly; (ii) direct the Expert to make his or her determination quickly; and (iii) take all reasonable steps to bring about a quick determination by the Expert.

(d) To avoid doubt, a dispute concerning the rate or cost of any Carbon Charge is a financial matter for the purposes of this clause 32.2.

32.3 Qualifications of Expert The Expert must:

(a) have reasonable qualifications and commercial and practical experience in the area of the Dispute;

(b) have no interest or duty which conflicts or may conflict with his or her function as Expert; and

(c) not be an employee or former employee of any of the parties. 32.4 Submissions The parties will be entitled to make oral and written submissions to the Expert. 32.5 Decision binding In the absence of a manifest error, the decision of the Expert will be valid and binding on the parties.

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32.6 Costs of Expert The costs of the Expert and any advisers will be borne equally by the parties, unless the Expert makes a determination to the contrary. 32.7 Dispute processes

(a) The parties may be legally represented in any Dispute resolution procedure. (b) The commencement or conduct of Dispute resolution procedures does not release

the parties from their respective obligations under this document. (c) Nothing in this clause 32 prevents a party from seeking injunctive or urgent

declaratory relief in respect of a Dispute or any matter arising in connection with this document.

Pipeline operator: DBNGP (WA) Transmission Pty LtdContract name: Standard Shipper Contract – Full Haul T1 (same clause is provided in relation to Part Haul and Back Haul standard contracts)Date: February 2015Applicable to: Dampier to Bunbury Natural Gas Pipeline Clause 24: Dispute Resolution and Independent Experts (page 126-9)24.1 Method of Resolution Any Dispute between the Parties must be resolved in accordance with the provisions of this clause. 24.2 Acknowledgment The Parties acknowledge that while Disputes may arise from time to time, their common intent is to ensure that any Dispute is resolved in a timely and cost effective manner. 24.3 Service of Notice If a Dispute arises at any time which is between the Parties, then either Party may give the other Party a notice in writing which is dated, signed, and must specify the precise nature of the Dispute (Dispute Notice). 24.4 Meeting Within 5 Working Days of service of a Dispute Notice, the Parties must meet and use all their reasonable efforts to resolve the Dispute (by negotiation or otherwise). 24.5 Senior Officers If the Dispute is not resolved within 10 Working Days after the meeting between the Parties under clause 24.4, the Parties must immediately refer the Dispute to their respective senior executive officers who must meet within 5 Working Days and use all reasonable efforts to resolve the Dispute. 24.6 Failure to Resolve Dispute If the Parties are unable to resolve the Dispute in accordance with clause 24.5, and the Dispute is a Technical Matter or a Financial Matter (as those expressions are defined in clause 24.7), then either Party may require that the Dispute be determined by an

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independent expert (Independent Expert) under clauses 24.8, 24.9 and 24.10 and if the Dispute is not a Technical Matter or a Financial Matter then either Party may commence proceedings in a court of competent jurisdiction in Western Australia. 24.7 Technical and Financial Matters In this clause 24: (a) a Technical Matter means a matter involving issues relating to the receipt,

transportation and delivery of Gas under this Contract which is capable of determination by reference to engineering or scientific knowledge and practice (including the grounds on which the Operator has issued an Unavailability Notice); and

(b) a Financial Matter means a matter involving financial calculations which is capable of determination by audit or reference to financial or accounting records, knowledge or practice.

24.8 Appointment of Independent Expert (a) The Party wishing to have the Dispute determined by an Independent Expert will give

written notice to that effect to the other Party. (b) The Parties will meet and use all reasonable endeavours to agree upon the identity of

the Independent Expert, but if they are unable to agree within 10 Working Days of the notice, then in relation to a Technical or Financial matter, either Party may refer the matter to the Australian Commercial Disputes Centre and request that a suitably qualified person be nominated by the Australian Commercial Disputes Centre, in accordance with the Rules of Expert Determination of the Australian Commercial Disputes Centre as amended from time to time, to act as Independent Expert to determine the Dispute.

(c) If the Australian Commercial Disputes Centre ceases to exist or otherwise ceases to provide the relevant expert nomination service, then the Institute of Arbitration and Mediation Australia is to substitute for the Australian Commercial Disputes Centre as the nominating body and nomination is to occur in accordance with the Expert Determination Rules of the Institute of Arbitrators and Mediators Australia as amended from time to time.

24.9 Expert not an Arbitrator The Independent Expert appointed under clause 24.8: (a) will act as an expert and not as an arbitrator; (b) must have no interest or duty which conflicts, or which may conflict, with his or her

function as the Independent Expert; (c) will not be a current or former employee or representative of, or a person who provides

consultancy services on a regular basis to, a Party or to a Related Body Corporate of a Party; and (d) must disclose fully to the Parties, before being appointed as the Independent

Expert, any interest or duty which may conflict with his or her position.24.10 Representation, Evidence, Confidentiality, Powers and Costs (a) Each Party may be legally represented at any hearing before the Independent Expert. (b) Each Party will be entitled to produce to the Independent Expert any materials or

evidence which that Party believes is relevant to the Dispute.

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(c) Each Party will make available to the Independent Expert all materials requested by him or her and all other materials which are relevant to his or her determination.

(d) The Independent Expert will not be bound by the rules of evidence and, subject to abiding by the rules of natural justice, the Independent Expert will have the power to inform himself or herself independently as to the facts to which the Dispute relates and to take such measures as he or she thinks fit to expedite the determination of the Dispute.

(e) Subject to the Independent Expert abiding by the rules of natural justice, the Independent Expert must determine the procedures to be followed in resolving the Dispute (including whether or not any hearing will take place) and the Parties must co-operate promptly with those procedures, but the Independent Expert must in any event:

(i) provide the Parties with a fair opportunity to make written submissions; (ii) provide written reasons for the Independent Expert's determination; and (iii) prior to handing down the determination, issue the determination in draft form to

the Parties and allow the Parties an equal and fair opportunity to lodge written submissions concerning the proposed determination which the Independent Expert must consider before settling and handing down the Independent Expert's determination.

(f)(i) Subject to clause 24.10(f)(ii) , all information, material and evidence obtained or

made available in the course of or for the purpose of the determination will be kept confidential by the Independent Expert and all the Parties.

(ii) Clause 24.10(f)(i) does not apply if: A. all the Parties otherwise agree; or B. the disclosure is authorised by Law or the disclosure is required by or under a

written Law of the State or the Commonwealth. (iii) If either Party becomes legally compelled to disclose information, material or

evidence obtained in the course of or for the purpose of the determination, that person must immediately provide the other Party with written notice so that the other Party may seek appropriate relief and may only disclose information, material or evidence which is legally required to be disclosed.

(iv) This clause does not make confidential, information, material or evidence which is in the public domain at the time it is obtained in the course of or for the purpose of the determination.

(v) The Parties acknowledge that damages are not a sufficient remedy for any breach of the obligations of this clause and both Parties are entitled to specific performance or injunctive relief (as appropriate) as a remedy for any breach or threatened breach, in addition to any other remedies available under any Law.

(g) Subject to any time prescribed anywhere else in this Contract, the Independent Expert will make a determination on the Dispute within a reasonable period of his or her appointment.

(h) The determination of the Independent Expert:

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(i) will be final and binding upon the Parties so far as the Law allows, except where a Party has been denied natural justice; and

(ii) will determine what, if any, adjustments may be necessary between the Parties. (i) The allocation of costs in relation to a determination by the Independent Expert will be

dealt with as follows: (i) unless the Parties otherwise agree before the reference of the Dispute, the

remuneration of the Independent Expert will be finally determined by the President for the time being of the appropriate body referred to in clause 24.8(b) who will have the power to fix the remuneration of the Independent Expert at the conclusion of the determination or, if requested by the Independent Expert, to determine a fair rate at which the Independent Expert will be remunerated at any time during the conduct of the determination process; and

(ii) unless the Parties otherwise agree, the Independent Expert will determine which Party will bear the costs of: A. the determination; andB. each Parties' own costs (including out of pocket costs) incurred in the

preparation and presentation of any submissions or evidence to the Independent Expert, and in what proportion, having regard to the degree to which he or she considers that Party was at fault or unreasonable in failing to agree to the matter under reference, and that Party will bear those costs accordingly.

24.11 Urgent Relief Condition Precedent to litigation (a) A Party must not commence any proceedings before any court in respect of a Dispute

which a Party requires to be determined by an Independent Expert under clause 24.6 unless the Dispute has first been referred to an Independent Expert and the Independent Expert does not determine the Dispute within 6 months of the date of the dispute being referred to the Independent Expert.

(b) Nothing in this clause 24.11 will preclude either Party from seeking any urgent interlocutory, injunctive or declaratory relief, or from commencing proceedings before any court to prevent its claim from being statute barred under the Limitation Act 1935 (WA) or any other relevant statute of limitation.

Pipeline operator: Tas Gas NetworksContract name: GDSA Standard Terms and ConditionsDate: November 2011Applicable to: Tas Gas Networks (distribution network)Clause 11: Resolving Disputes (page 14-15)

11.1. The parties intend that any dispute or differences between them concerning the Agreement will be resolved amicably by good faith discussion.11.2. Where any dispute or difference arises between the parties concerning the Agreement, no party may commence any proceedings unless that party has complied with the procedures set out in this clause 11.

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11.3. If any dispute or difference arises between the parties concerning the Agreement, either party may give notice to the other party. If the dispute or difference is not resolved by discussion between operational staff within 20 working days of notice being given, the matter is to be referred to the Chief Executives of the parties for resolution.11.4. If the dispute or difference cannot be resolved by the Chief Executives within 15 working days of the matter being referred to them, either party may require the matter to be referred to mediation by notice to the other party setting out the general nature of the difference.11.5. Within 10 working days of receipt of the notice referring the dispute to mediation the parties will agree on the appointment of a mediator or, where they cannot agree within that timeframe, a mediator will be appointed by the President for the time being of the Law Society of Tasmania. In consultation with the mediator, the parties will determine a location, timetable and procedure for the mediation or, if the parties cannot agree, these matters will be determined by the mediator.11.6. Each of the parties will appoint a representative who will have authority to reach an agreed solution and effect settlement.11.7. In all matters relating to the mediation notice, the parties and their representatives will act in good faith and use all reasonable endeavours to ensure the expeditious completion of the mediation procedure.11.8. All proceedings and disclosures in the course of the mediation will be conducted and made without prejudice to the rights and positions of the parties in any subsequent arbitration or other legal proceedings.11.9. Any decision or recommendation of the mediator will not be binding on the parties in respect of any matters other than the conduct of the mediation.11.10. The costs of the mediation, other than the parties’ legal costs, will be borne equally by the parties, who will be jointly and severally liable to the mediator in respect of the mediator’s fees.11.11. If the difference is not resolved through mediation within 60 days of the appointment of a mediator, the matter will be referred to arbitration under the Commercial Arbitration Act 1986 before a sole arbitrator and in relation to any such arbitration, the following provisions will apply:

a) in addition to the stated methods of giving notice, facsimile will also be permitted;b) the parties will endeavour to agree the choice of an arbitrator and failing

agreement, the arbitrator will be appointed by the President of the Law Society of Tasmania;

c) the venue of the arbitration will be Hobart;d) the arbitrator will not appoint any expert to advise except with the written consent

of both parties.

11.12. Nothing in this clause 11 will preclude either party from taking immediate steps to seek urgent injunctive or equitable relief before an appropriate court.

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Appendix C State based access regimes - arbitration mechanismsSouth Australian Ports Access Regime Western Australian Rail Access Regime AustralAsia Railway Access Regime

Background The Essential Services Commission (ESCOSA) is the economic regulator for six commercial ports in SA. Regulation is only applied to ‘proclaimed ports’ under the Maritime Services (Access) Act 2000 (SA) (MSA Act).

The Railways Access Act 1998 (WA) establishes a rail access regime that encourages the efficient use of, and investment in, railway facilities by facilitating a contestable market for rail operations.The Railways (Access) Code 2000 (WA) was established in accordance with the Act to give effect to the Competition Principles Agreement in respect of railways to which the Code applies. The Economic Regulation Authority (ERA) is responsible for the administration of the Act and Code.

The AustralAsia Railway (Third Party Access) Code, established by an SA and NT Acts of the same name. ESCOSA is the regulator under the Code (and may exercise and perform the powers and functions of the regulator under this Code for the purposes of both the law of the Northern Territory and the law of South Australia).

Purpose The MSA Act provides for access to SA ports and maritime services on fair commercial terms and to regulate the price of essential maritime services.

Establishes a rail access regime that encourages the efficient use of, and investment in, railways facilities by facilitating a contestable market for rail operations.

The Code makes provision for the regulation of third party access to the AustralAsia (Tarcoola-Darwin) railway.

Applicable to Regulated services (declared by proclamation to be regulated services under section 10 of MSA Act)

Railway network covered by the regime comprises about 5,000 route kilometres of track in the south-west of Western Australia and the Pilbara Infrastructure railway stretching 260 kilometres from the eastern Pilbara to Port Hedland.

Applies to the railway between Tarcoola and Darwin

How dispute resolution clause can be triggered

A person who wants a regulated service (the proponent) may make a written proposal to a regulated operator setting out proposed terms and conditions for the provision of the maritime service.217

If, within 30 days after the proposal is made, the operator, the proponent and any interested third parties have not agreed on terms for the provision of the proposed service, a dispute exists.A party may refer the dispute to the ESCOSA.218

Once the access seeker has indicated a readiness to begin negotiations, parties must agree to a negotiation period, which must be no more than 90 days, unless both parties agree to extend the time line. During the negotiation process, the access seeker may ask the ERA to assess whether the price offered is fair in relation to that which other parties are paying.An entity (the other party) that is in dispute with the railway owner may, by notice in writing to the Regulator, refer the dispute to arbitration.219

An access dispute exists if: (a) a respondent to an access proposal, within 30 days after the response date or such other time as may be prescribed, refuses or fails to enter into good faith negotiations with the access seeker; (b) the access seeker, after making reasonable attempts to reach agreement with the respondents, fails to obtain an agreement on the access proposal or an agreed modification of the proposal; or (c) all parties agree that there is no reasonable prospect of reaching agreement.220

217 Maritime Services (Access) Act 2000 (SA), section 13218 Ibid, section 15.219 Railways (Access) Code 2000 (WA), clause 26.220 AustralAsia Railway (Third Party Access) Code, clause 13.

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South Australian Ports Access Regime Western Australian Rail Access Regime AustralAsia Railway Access RegimeDispute resolution available

Provides for conciliation and arbitration to occur for disputes over access to Regulated Services that cannot be otherwise resolved between the parties.Conciliation – ESCOSA must attempt to resolve via conciliation in first instanceArbitration – if dispute is not resolved via conciliation, or appears cannot be resolved by conciliation, or if unresolved within 6 months, ESCOSA may refer the dispute to arbitration.221

Arbitration Conciliation - if the parties to the dispute agree they may attempt to settle the dispute by conciliation by ESCOSAArbitration - if the parties do not agree to conciliation or they agree but after making a reasonable attempt to do so ESCOSA fails to settle the dispute by conciliation222

Arbitration Available Arbitration form Independent arbitration provided by statutory

instrument, and the Commercial Arbitration Act 1986 (SA) applies to an arbitration under the MSA Act to the extent that it may operate consistently.223

Independent Arbitration provided by statutory instrument, and the Commercial Arbitration Act 2012 (WA) applies to an arbitration

Independent arbitration provided by statutory instrument

Appointment of arbitrator

ESCOSA selects arbitrator in consultation with parties to the dispute, and arbitrator must be: independent to parties; have no control or direction of SA government; properly qualified; no interest in the outcome of the dispute.224

The ERA appoints one or more persons to act as arbitrators, from the names included on a panel established by the ERA.

ESCOSA selects arbitrator and must keep a list of persons who are suitably qualified to be appointed as arbitrators but may appoint as an arbitrator a person who is not included in the list if the occasion requires. Arbitrator must be: independent to parties; have no control or direction of SA government; properly qualified; no interest in the outcome of the dispute. Before appointing an arbitrator ESCOSA must consult with all parties and attempt to reach agreement.225

221 MSA Act, section 18(1).222 AustralAsia Railway (Third Party Access) Code, clause 15.223 Ibid, clause 19.224 Ibid, clause 18(3).225 Ibid, clause 16.

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South Australian Ports Access Regime Western Australian Rail Access Regime AustralAsia Railway Access RegimeProcess ESCOSA may participate in arbitration

proceedings and may call evidence and make representations on the questions subject to the arbitration.226

Arbitrator has procedural powers under section 26, including to refer a matter to an expert for report, and may engage a lawyer to provide advice on the conduct of the arbitration and to assist the arbitrator in drafting the award.Arbitrator has the power obtain information and documents.227

A preliminary conference must occur within 10 days. During the preliminary conference, both parties will be expected to agree to a timetable for the arbitration.228

The arbitrator may refer a question that arises in the course of the hearing of a dispute to the Regulator and request his or her opinion, advice or comments on the question.229

Arbitrator may require evidence or argument to be presented in writing, and may decide the matters on which it will hear oral evidence or argument.Hearing may be held by telephone, CCTV or other means of communication.230

ESCOSA may participate in arbitration proceedings and may call evidence and make representations on the questions subject to the arbitration.231

Determination Award must be in writing, set out the reasons on which it is based and specify the period it remains in force.232

The arbitrator is to determine the dispute by making a written determination, which is to be taken to be an award within the meaning of the Commercial Arbitration Act 2012. Arbitrator is not required to allow the other party to use the infrastructure.233

The arbitrator’s determination can specify terms, conditions and costs for access.

Arbitrator must make a written award and may deal with any matter relating to access to the service by the access seeker, including matters that were not the basis for notification of the dispute.The arbitrator must give a draft award to the parties to the arbitration and the regulator.234

Confidentiality Hearing are held in private, unless parties agree otherwise. Parties may ask the arbitrator to keep the information or the contents of the documents confidential.

Hearings are held in private, unless parties agree otherwise. A party to an arbitration hearing may ask the arbitrator to keep a document or part of a document confidential and not give a copy to the other party.235

Time limits An award must be made within the period of 6 months from the date on which the dispute is referred to arbitration (the standard period).236

An arbitrator must proceed with the arbitration as quickly as the proper investigation of the dispute, and the proper consideration of all matters relevant to the fair determination of the dispute,

No time prescribed.Example: CBH Group and Brookfield Rail are currently in dispute – 90 days of statutory negotiation period has expired. Could take more than a year to get an outcome from arbitration under the Code.

No time prescribed.

226 Ibid, clause 22.227 Ibid, clause 27.228 Railways (Access) Code 2000 (WA), clause 28.229 Ibid, clause 30.230 AustralAsia Railway (Third Party Access) Code, clause 27.231 Ibid, clause 22.232 MSA Act, section 31.233 Railways (Access) Code 2000 (WA), clause 17.234 AustralAsia Railway (Third Party Access) Code, clause 19.235 Ibid, clause 33.236 MSA Act, section 30A

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South Australian Ports Access Regime Western Australian Rail Access Regime AustralAsia Railway Access Regimeallow.237

Costs Costs are to be borne by the parties in proportions decided by the arbitrator, and in the absence of a decision by the arbitrator, in equal proportions.238

Operation A proponent may, within 7 days after the making of an award or such further time as the ESCOSA may allow, elect not to be bound by the award by giving written notice of the election to ESCOSA. Within 7 days of receiving notice of election not to be bound, ESCOSA must notify the operator and any other parties to the arbitration.239

An arbitrated decision is binding on both parties, except when the access seeker decides not to obtain access under the arbitrated terms.240

Determination is binding on the operator but the user has 14 days to decide whether to accept or reject it.

An award is binding on the parties to the arbitration in which it is made, has effect 21 days after it is made unless the access seeker, before that time, elects not to be bound by it (within 7 days of award).241

Enforcement An award is enforceable as if it were a contract between the parties to the award.242 An award cannot be challenged or called into question except by appeal on a question of law to the Supreme Court.243

An award cannot be challenged or called into question except by appeal on a question of law to the Supreme Court.244

237 Ibid, section 23.238 Ibid, Section 41.239 Ibid, section 35.240 Railways (Access) Code 2000 (WA), clause 34.241 AustralAsia Railway (Third Party Access) Code, clause 35.242 MSA Act, section 37.243 Ibid, section 40.244 AustralAsia Railway (Third Party Access) Code, clause 37.

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Appendix D International arbitration examplesNew Zealand Utilities Access Canadian Transportation Access

Background The National Code of Practice for Utility Operators' Access to Transport Corridors is a legislated requirement under the Utilities Access Act 2010. The Code applies to the activities of all transport corridor managers and utility operators throughout New Zealand.

The Canada Transportation Act is the federal framework legislation to implement the federal government’s transportation policy and for the Canadian Transportation Agency’s administrative role.

Purpose Provides a nationally consistent and cooperative framework for corridor managers and utility operators, to manage transport corridors while also providing for the access rights of utility operators.

The Act articulates a National Transportation Policy that contributes to economic growth and prosperity by giving primacy to transportation services based on competition and market forces.

Applicable to Road Corridors, Motorway Corridors and Railway Corridors in New Zealand as defined in the Code

Applies in respect of transportation matters in Canada, as defined under the Act.

When dispute resolution clause can be triggered

Once a Notice of Dispute has been issued, the Parties must: within ten of receipt of the Notice of Dispute, enter into negotiations to resolve the Dispute; and be represented during negotiations by a senior representative of each Party who has the authority to settle the Dispute. If senior representatives are unable to resolve the Dispute within 20 days of receipt of the notice then: § either party may refer the Dispute to expert

determination; or

§ both parties may agree to refer the Dispute to mediation; or

§ either party may refer Dispute to arbitration; or

§ either party may refer the Dispute to proceedings in the District Court, if Dispute is capable of resolution in accordance with relevant Acts.245

Not specified

Dispute resolution available

Expert determinationMediationArbitration

Facilitation (by Agency)Mediation (by Agency)Arbitration - The Act contains several arbitration provisions designed to facilitate the resolution of rate and service disputes between carriers and shippers or transit authorities.Adjudication (by Agency)

Arbitration AvailableArbitration form Independent arbitration provided by statutory

instrument, applies the Arbitration Act 1996 (NZ)§ Rail level of service

arbitration246 § Final offer arbitration247 § (Shipper or urban transit

§ Rail arbitration248

§ (Both parties have to agree to

245 National Code of Practice for Utility Operators' Access to Transport Corridors (New Zealand), clause 7.3.

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New Zealand Utilities Access Canadian Transportation Access§ (Shipper initiates, the railway

has 10 days to object)authority may initiate) arbitrate)

§ If sections 36.1 (mediation) and 169.1 (mediation) do not apply, the Agency may mediate or arbitrate a dispute (with some matters excluded), if requested to do so by all parties to the dispute.

Arbitrator Independent arbitrator § Agency arbitrator § External independent arbitrator (or panel of 3 arbitrators)

§ An Agency Arbitrator or external arbitrator

Appointment of arbitrator

The arbitrator must be appointed by agreement between the Parties. However, if the Parties cannot agree on an arbitrator within five Working Days of receipt of the Arbitration Referral Notice, the arbitrator will be appointed at the written request of either Party by the President of the New Zealand Law Society (or his/her nominee) or its successor body.249

Determined by the Agency § The parties appoint the arbitrator or if the parties cannot agree the Agency appoints.

The parties appoint the arbitrator or if the parties cannot agree the Agency appoints.

Process In the absence of agreement, the arbitration will take place in Auckland or Wellington (at the arbitrator’s discretion) The arbitrator must adopt a procedure which, in the arbitrator’s opinion, is the most simple and expeditious procedure practicable in the circumstances The arbitrator may determine the Dispute without a hearing unless either Party gives notice requiring one, in which case the arbitrator must treat that as a material consideration in assessing costs.

§ Parties must each submit, within 10 days after the day on which a submission was made.

§ Parties must exchange the information that they intend to submit to the arbitrator within 20 days after the day on which a submission is served. The Agency must refer, within two days after the day on which it receives the last of the two proposals, the matters for arbitration.

§ The Agency may, at the arbitrator’s request, provide administrative, technical and legal assistance. The Agency may make rules of procedure.

A range of processes and timeframes are outlined in the Act. The arbitrator and parties decide how to conduct the arbitration proceedings. If the parties cannot agree, the Agency will provide the rules of procedure. The arbitrator is required to conduct the arbitration proceedings as expeditiously as possible and, in the manner the arbitrator considers appropriate having regard to the circumstances of the matter.The Agency can also provide administrative, technical or legal assistance if requested by the arbitrator.

Determination Decision must be in writing; be for a period of one year as of the date of decision, unless the parties agree otherwise; and be

The arbitrator must choose either the final offer of the shipper or the carrier.The decision does not include

246 Canada Transportation Act, section 169.31.247 Ibid, section 161.248 Ibid, section 36.2.249 National Code of Practice for Utility Operators' Access to Transport Corridors (New Zealand), clause 7.6.

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New Zealand Utilities Access Canadian Transportation Accesscommercially fair and reasonable to the parties.

reasons. On request, within 30 days of the arbitrator's decision, or seven days under the summary process (>$750,000), the arbitrator shall provide written reasons.

Confidentiality If the Agency and the arbitrator are advised that a party to an arbitration wishes to keep information relating to the arbitration confidential, the Agency and the arbitrator must take all reasonably necessary measures to ensure that the information is not disclosed by the Agency or the arbitrator

The rates and/or conditions of the movements contained in the selected offer may be published in a public tariff or included in a confidential contract, as agreed on by the parties.Where the Agency is advised that a party wishes to keep matters relating to the arbitration confidential, the Agency and the arbitrator shall take all reasonably necessary measures to ensure that the matters are not disclosed; and no reasons for the decision given pursuant to subsection 165(5) shall contain those matters or any information included in a contract that the parties agreed to keep confidential.

Time limits The Parties must co-operate to ensure the expeditious conduct of the arbitration. Each Party must comply with any reasonable time limits sought by the other for settling the terms of reference, interlocutory matters and all other steps preliminary and incidental to the determination of the dispute.

Decision must be made within 45 days of submission to the Agency, unless the arbitrator believes period is not practical and must make in 65 days, unless parties agree otherwise.

Unless the parties agree to a different time frame, arbitration must be completed within 60 days, or 30 days for disputes involving freight charges of less than $750,000 (unless an extension is requested).

A reasonable timeframe for the determination is determined by parties or arbitrator.

Costs Parties are to share costs equally, including those borne by the Agency in providing administrative, technical and legal assistance. Agency may fix the fee to be paid to it or, if the arbitrator is not a member or on the staff of the Agency, to the arbitrator for the arbitrator’s services.

The shipper and the carrier share the costs equally, whether or not the proceedings are terminated. Arbitrators may establish their own fee structures, although the Agency may, in some circumstances, fix arbitrator costs. The parties share the Agency's cost of providing administrative, technical and legal assistance requested by the arbitrator or arbitration panel.

Parties are jointly and severally, or solitarily, liable to reimburse the Agency its costs arising from the mediation or arbitration.

Operation Award is final and binding on Parties. The arbitrator’s decision is final and binding on the parties.

Unless the parties agree otherwise, the arbitrator's decision is final and binding on the parties and

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New Zealand Utilities Access Canadian Transportation Accessretroactive to the date of the shipper's initial submission to the Agency. The decision will remain in effect for one year, provided the parties did not previously agree on a lesser period.

Enforcement Its enforceability between the parties is deemed to be a confidential contract.

The arbitrator's decision is enforceable as if it were an order of the Agency.

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Appendix E Pricing principles used in other access regimes

This Appendix provides an overview of the pricing principles contained in the regimes that have been reviewed. The regimes covered in this summary principally cover negotiate-arbitrate regimes within the infrastructure sector, although several examples of price monitoring are also covered.250 In summary, the review shows that:

§ In a small number of cases, the arbitrator is only required to have regard to a suite of factors and is not provided with any further instruction on pricing principle – in these cases, it would be open for the arbitrator to determine prices that reflect cost, but not mandated.

§ A number of regimes provide an express requirement for the arbitrator to set a cost-based price, but leave it to arbitrator to determine how this is to be determined, including whether costs should reflect actual costs or hypothetical (new entrant) cost.

§ A number of regimes provide the further requirement for prices to be set with reference to actual cost, with differing levels of guidance as to how actual cost should be determined – the price monitoring regimes summarised herein fall into this category.

§ A number of regimes provide the further requirement for prices to be set with reference to hypothetical cost (i.e., a variant of replacement cost), together with differing levels of guidance as to how such prices should be determined.

The regimes that fall under each of these classifications are summarised in turn below.

E.1 Discretion for the regulator

E.1.1 South Australian Maritime Services (Access) Act 2000

Coverage of the regime

The regime applies an access regime for various proclaimed port services for the six key ports in the state (spanning a variety of activities, including bulk agricultural commodity and containers). Pricing principles are set out in the South Australian Maritime Services (Access) Act 2000 in order to guide decisions of an arbitrator.

Summary of the guidance

The guidance that applies to an arbitrator comprises a broad set of factors to take into account, as well as specific pricing principles, which is replicated below:

250 The term “price monitoring” in Australia is referred to as “information disclosure” in New Zealand. In both cases, public disclosure of information is required that is intended to provide a moral suasion over pricing decisions, with any regulatory intervention being indirect.

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(1) In deciding on the terms of an award, the arbitrator should take into account—(a) the operator's legitimate business interest and investment in the port or port facilities;

and(b) the costs to the operator of providing the service (including the costs of any necessary

modification to, or extension of, a port facility) but not costs associated with losses arising from increased competition in upstream or downstream markets; and

(c) the economic value to the operator of any additional investment that the proponent or the operator has agreed to undertake; and

(d) the interests of all persons holding contracts for use of any relevant port facility; and(e) firm and binding contractual obligations of the operator or other persons (or both)

already using any relevant port facility; and(f) the operational and technical requirements necessary for the safe and reliable provision

of the service; and(g) the economically efficient operation of any relevant port facility; and(h) the benefit to the public from having competitive markets; and(i) the pricing principles specified in subsection (2) .

(2) The pricing principles relating to the price of access to a service are as follows:(a) that access prices should allow multi-part pricing and price discrimination when it aids

efficiency;(b) that access prices should not allow a vertically integrated operator to set terms and

conditions that would discriminate in favour of its downstream operations, except to the extent that the cost of providing access to others would be higher;

(c) that access prices should provide incentives to reduce costs or otherwise improve productivity.

Importantly, while the arbitrator is directed to consider cost, there is no explicit requirement to set prices that are based upon recovering cost. The specific pricing principles direct the arbitrator to consider economic issues in relation to price structure, and also to consider the incentives created, but not to look at overall cost recovery (note that these pricing principles are very similar to those in Part IIIA, but omit the first principle).

E.1.2 South Australian Railways (Operations and Access) Act 1997


The South Australian Railways (Operations and Access) Act 1997 (ROA Act) includes pricing principles that an arbitrator must take into account during a dispute for railways covered under the Act. These are the Adelaide Metro broad gauge network within metropolitan Adelaide, the Genesee and Wyoming (GWA) lines in the Murray-Mallee, Mid-North and Eyre Peninsula, and the Great Southern Railway passenger terminal at Keswick.


The guidance and pricing principles that apply to arbitration (contained in section 38 of the ROA Act) are virtually identical to the ports regime (summarised above), and are replicated below:

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(1) The arbitrator must take into account—

(a) the objects of this Act; and

(b) the non-discrimination principles; and

(c) the operator's legitimate business interests and investment in railway infrastructure; and

(d) the cost to the operator of providing access as sought by the proponent (excluding costs arising from increased market competition); and

(e) if applicable—the economic value to the operator of additional investment the proponent proposes to undertake; and

(f) the economically efficient operation of the railway infrastructure; and

(g) the pricing principles—

(i) relating to the fixing of floor and ceiling prices specified in section 27 ; and

(ii) relating to the price of access to a railway service specified in subsection (2) ; and

(h) the price of comparable services for other industry participants (including—if applicable—the operator itself); and

(i) the interests of industry participants whose interests may be affected by the proposal; and

(j) the contractual obligations of the operator and existing industry participants; and

(k) the operational requirements for the safe and reliable operation of the railway infrastructure; and

(l) the public interest in market competition; and

(m) relevant technical and legal issues; and

(n) other matters the arbitrator considers appropriate.

(2) The pricing principles relating to the price of access to a railway service are as follows:

(a) that access prices should allow multi-part pricing and price discrimination when it aids efficiency;

(b) that access prices should not allow a vertically integrated operator to set terms and conditions that would discriminate in favour of its downstream operations, except to the extent that the cost of providing access to others would be higher;

(c) that access prices should provide incentives to reduce costs or otherwise improve productivity.

The one difference to the Ports Act is the reference in section 38(1)(g) to floor and ceiling prices, which ordinarily would imply a reference to cost. However, the definition of the ceiling price in section 27 of the regime is unusual and not necessarily something that would be tied to cost, as follows:

(2) The floor price should reflect the lowest price at which the operator could provide the relevant services without incurring a loss and the ceiling price should reflect the highest price that could fairly be asked by an operator for provision of the relevant services.

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E.2 Requirement to set cost based access prices

E.2.1 Competition and Consumer Act 2010


The pricing principles that are set out in section 44ZZCA of the CCA apply across access disputes and access undertakings or codes. The pricing principles apply to services that have been declared by the Minister under Part IIIA of the CCA. As such, they were drafted with the potential to be applied to a broad range of bottleneck infrastructure facilities.


The arbitrator under Part IIIA (which is the ACCC) is required to take into account a broad range of factors when determining a dispute, and further is required to apply specified pricing principles. The relevant provisions (drawn from sections 44X and 44ZZCA) are as follows:

(1) The Commission must take the following matters into account in making a final determination:

(aa) the objects of this Part;

(a) the legitimate business interests of the provider, and the provider’s investment in the facility;

(b) the public interest, including the public interest in having competition in markets (whether or not in Australia);

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

(d) the direct costs of providing access to the service;

(e) the value to the provider of extensions whose cost is borne by someone else;

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

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

(g) the economically efficient operation of the facility;

(h) the pricing principles specified in section 44ZZCA.

(2) The Commission may take into account any other matters that it thinks are relevant.

…

The pricing principles relating to the price of access to a service are:

(a) that regulated access prices should:

(i) be set so as to generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services; and

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(ii) include a return on investment commensurate with the regulatory and commercial risks involved; and

(b) that the access price structures should:

(i) allow multi-part pricing and price discrimination when it aids efficiency; and

(ii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher; and

(c) that access pricing regimes should provide incentives to reduce costs or otherwise improve productivity.

The provision that directs the arbitrator to set a cost-based price is the requirement to set prices consistent with generating expected revenue that is at least sufficient to recover efficient cost – this a cost-based price. However, there is no further guidance about how cost is to be determined.

E.2.2 Victorian Essential Services Commission Act 2001


The pricing principles that exist in the Victorian Essential Services Commission Act 2001 (ESC Act) apply to the broad range of industries that are regulated by the ESC. Similar to the CCA, the principles may also apply in a variety of circumstances. This might include where the ESC is making a determination under a price monitoring regime or in the case where it is needed to act as an arbitrator in a dispute under a negotiate / arbitrate regulatory framework.


The pricing principles in the ESC Act replicate those in the CCA.

E.3 Requirement to apply cost, measured with reference to actual cost

E.3.1 Port of Melbourne


The regulatory framework that applies to the newly privatised Port of Melbourne (PoM) assets is a price monitoring framework overseen by the ESC of Victoria. The regime covers services defined in the Port Management Act 1995 (PMA) as Prescribed Services.

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The price monitoring regime that applies to PoM is established via a Pricing Order. The price monitoring regime that applies under the Pricing Order is different to the standard approach to price monitoring in Australia. It includes a formal requirement for an actual cost based approach such that prices generate revenue equal to an “annual aggregate revenue requirement”. Importantly, this is to be established by applying the building block method. Clause 2.1.1 of the Pricing Order provides that Prescribed Service Tariffs must be set so as:

To allow the Port Licence Holder a reasonable opportunity to recover the efficient cost of providing all Prescribed Services determined by application of an accrual building block methodology of the type described in clause 4 (Aggregate Revenue Requirement);

Another important feature of the regime for the Port of Melbourne is that it establishes the opening asset value. That is, clause 4.7.1 of the Pricing Order deems a specific initial asset value that must be used at the commencement of the regime.

The Pricing Order also contains other guidance that would not be out of place in an ex-ante price setting regime. This includes guidance on the approach to depreciation, the weighted average cost of capital, cost allocation, tariff rebalancing and the updating of the asset base over time.

E.3.2 Airports in Australia


The ACCC monitors prices, costs, profits and quality of aeronautical services and car parking at Brisbane, Melbourne, Perth and Sydney airports. This is done in accordance with directions issued by the Assistant Treasurer under the CCA and the Airports Act 1996.


The ACCC specifies in its ‘Airports prices monitoring and financial reporting guideline’ its price monitoring and financial reporting requirements for Airport Operators. It incorporates recommendations in Productivity Commission reviews as to the approach to price monitoring for airports.

The primary requirement for airports is to report on their costs of operations. Airport Operators are expected to be capable of fully disclosing and explaining each item of information provided to the ACCC and all principles adopted in their calculation.

Previously, with respect to asset values in this regime in Australia, the Airport Operators undertook periodic revaluations of the asset base. However, following a 2006 review of airports pricing by the Productivity Commission a ‘line in the sand’ was effectively applied to the asset base such that adjustments to these values are now undertaken in a manner

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consistent with the building block approach.251 As noted in the ACCC’s guideline the Government accepted the Productivity Commission’s recommendation such that a form of ‘lock-in and roll-forward’ was intended to apply for the asset base. Specifically:252

Under the new price monitoring regime, the value of an airport’s asset base for monitoring purposes should be:

The value of tangible (non-current) aeronautical assets reported to the Australian Competition and Consumer Commission (ACCC) as at 30 June 2005, adjusted as necessary to reflect the proposed service coverage of the new regime;

Plus new investment;

less depreciation and disposals.

The ACCC has stated the principles it will apply to the asset base as follows:253

The following general principles underlie the ACCC’s approach:

to minimise the cost of divergence between statutory and regulatory accounts (which implies that the ‘line in the sand’ asset base is to be distinguished from the aeronautical asset base as reported under AIFRS);

the ‘line in the sand’ asset base must be capable of being audited, and of being reconciled with the aeronautical asset base as reported under AIFRS;

the ‘line in the sand’ asset base will be based on a number that has previously been reported to the ACCC – it does not allow for a revisiting or revaluation of a previously-reported number;

the cost incurred by Airport Operators in complying with the ACCC’s approach should be no greater than necessary.

Further, in terms of the roll-forward of the asset base, the guideline states:254

Airport Operators are required to roll forward the ‘line in the sand’ asset register based on the starting points outlined above. The adjustments made to the statutory asset register would need to be documented separately to form a sufficient audit trail as detailed in Section 3 of this Guideline (see 3.8).

E.3.3 Airports in New Zealand

Coverage

The regulatory regime is price monitoring, and applies to the specified airport services of the three main New Zealand airports (namely, Auckland, Wellington and Christchurch). The specified airport services cover the use of the airfield, passenger movement-related

251 Productivity Commission, Review of Price Regulation of Airport Services, Inquiry Report No. 40, 14 December 2006.

252 ACCC, Airport prices monitoring and financial reporting guideline Information Requirements under Part 7 of the Airports Act 1996 and Section 95ZF of the Trade Practices Act 1974, June 2009, p.22.



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activities within terminals and the provision of facilities within secure areas for aircraft and freight activities.Under the regime, airports are required to make a disclosure in relation to forecast revenue and costs at the time that prices are reset (generally every five years) and are also required to disclosure actual costs and revenue annually.

Pricing principles

The Commerce Act 1986 (NZ) requires the Commerce Commission to determine Input Methodologies that set out how the various forms of regulation are to be applied. For the price monitoring regime that applies to the airports, the Commission has determined (amongst other things):255

§ a starting regulatory asset value for the specified airport services at the commencement of the regime, as well as a method for updating that value over time (i.e., capital expenditure added and depreciation deducted);

§ rules for the allocation of costs between regulated and unregulated services (which is a particular issue for airports, given the joint use of terminals);

§ formulae for calculating the internal rate of return expected over a forecast period and for calculating the internal rate of return achieved over a particular year; and

§ inputs and a formula for calculating the midpoint value for the weighted average cost of capital at any point in time, as well as inputs and a formula for calculating probability distribution of the true weighted average cost of capital around the midpoint value.

E.3.4 Gas pipelines revenue and pricing principles


The revenue and pricing principles in the NGL apply to access determinations made by the AER. As such, they apply across full regulation and light regulation decisions. By implication, therefore, they apply to price arbitration decisions for light-handed regulation scheme pipelines.


The current revenue and pricing principles that apply to gas pipelines are also an example of an actual cost approach.256 That is, the arbitrator or regulator is required to have regard to efficient costs, and in the context of the asset base, is required to have regard to previously adopted values in any previous full access arrangement decision or a decision of a relevant regulator under section 2 of the code, or in the Rules.

255 The principle requirements are specified in the Input Methodologies, with further detail about the form of disclosure requirements being specified in the Information Disclosure Determination. The first input methodologies were determined in December 2010, and the first review of those Input Methodologies has recently been concluded (December 2016).

256 Part 3, Division 2, section 24 of the NGL.

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Specifically, the revenue and pricing principles are set out here. Section 24(4) is the provision that demonstrates that an actual costs approach is to be applied:

(1) The revenue and pricing principles are the principles set out in subsections (2) to (7).

(2) A service provider should be provided with a reasonable opportunity to recover at least the efficient costs the service provider incurs in—

(a) providing reference services; and

(b) complying with a regulatory obligation or requirement or making a regulatory payment.

(3) A service provider should be provided with effective incentives in order to promote economic efficiency with respect to reference services the service provider provides. The economic efficiency that should be promoted includes—

(a) efficient investment in, or in connection with, a pipeline with which the service provider provides reference services; and

(b) the efficient provision of pipeline services; and

(c) the efficient use of the pipeline.

(4) Regard should be had to the capital base with respect to a pipeline adopted—

(a) in any previous—

(i) full access arrangement decision; or

(ii) decision of a relevant Regulator under section 2 of the Gas Code;

(b) in the Rules

(5) A reference tariff should allow for a return commensurate with the regulatory and commercial risks involved in providing the reference service to which that tariff relates.

(6) Regard should be had to the economic costs and risks of the potential for under and over investment by a service provider in a pipeline with which the service provider provides pipeline services.

(7) Regard should be had to the economic costs and risks of the potential for under and over utilisation of a pipeline with which a service provider provides pipeline services.

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E.4 Requirement to apply cost, measured with reference to hypothetical (replacement) cost

E.4.1 Telecommunications in Australia (pre 2011)


The ACCC is the regulator for telecommunications in Australia and is able to make access determinations in accordance with the CCA. The services that are of most relevance here are fixed line services, which include:

§ unconditioned local loop service (ULLS)

§ line sharing service (LSS)

§ fixed originating access service (FOAS)

§ fixed terminating access service (FTAS)

§ wholesale line rental (WLR)

§ local carriage service (LCS).

With respect to these services the ACCC was required to approve (or otherwise) access undertakings submitted by access providers. It was also required to arbitrate disputes between parties concerning the terms and conditions of access to declared telecommunications services.


In 1997 the ACCC produced a document to outline the principles that would guide it when considering access pricing issues for telecommunications services. While the ACCC indicated that the principles were not intended to unreasonably limit the outcomes of commercial negotiations, it was noted that it may guide negotiations by providing an indication of the approach the ACCC would take in arbitrating disputes.

The discussion of pricing principles was divided into three parts. The first part established broad pricing principles. The second part provided a number of guides that would be useful in determining whether prices are consistent with the principles. The third part established a specific cost-based pricing methodology. It is this third part that established the ‘hypothetical new entrant/replacement cost’ approach to cost for the regime.

Specifically, the ACCC chose to apply the Total Service Long Run Incremental Cost approach (TSLRIC). This was applied on the basis that it reflected forward looking costs, which are the ongoing costs of providing the service, and was considered to reflect the price that would prevail if the access provider faced effective competition.257

257 ACCC, Access Pricing Principles – Telecommunications, a guide, July 1997, p.29

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E.4.2 AustralAsia Railway


The AustralAsia Railway third party access regime applies to the Adelaide to Darwin railway line. The regime is a negotiate / arbitrate regime that applies to both passenger and freight services. The regime is set out in the AustralAsia Railway (Third Party Access) Act 1999 which further establishes an Access Code within it.


The AustralAsia Railway regime includes a feature that is relatively unique to other regimes. That is that the approach to arbitration is contingent upon a finding of the extent a sustainable competitive price for the service exists. Specifically, the pricing principles state:

(1) The access price payable to the access provider by an access seeker for a railway infrastructure service provided to enable the access seeker to deliver a freight service will be determined by the arbitrator and will depend on whether there is—

(a) a sustainable competitive price (as to which see subsections (2) to (6)); or

(b) no sustainable competitive price (as to which see section 2).

The clause directly following this one then provides guidance on what is to be taken into account when deciding if a sustainable competitive price exists. This guidance relates to the identification of barriers to entry and the availability or potential availability of substitutes that provide an effective constraint on price. Where there is a sustainable competitive price the access price payable will be a price determined by the arbitrator which is not more than a ceiling price and not less than a floor price; with each of these determined in accordance with guidance in the access code. In essence, the ceiling is the stand-alone cost while the floor is the incremental cost.

Where no sustainable competitive price exists, a more detailed assessment is required by the arbitrator. It is here that the hypothetical new entrant cost approach is prescribed. Specifically, Division 1, clause (2)(3) of the schedule provides that the forward looking and efficient costs be used for the calculation of costs. Further, with respect to valuing the asset value for the ceiling and floor price, the Depreciated Optimised Replacement Cost approach is required.258

E.4.3 Western Australian Railways (Access) Code 2000


The Western Australian Railways (Access) Code 2000 sets out a negotiate / arbitrate regulatory framework for routes that are specified in Schedule 1 of the Code. The route types for which specific routes are identified include:

258 Section 2, clause (7)(a) and Section 3, clause 4(a) of Division 1 of the Schedule; AustralAsia Railway (Third Party Access) Code.

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§ Standard gauge routes.

§ Narrow gauge routes.

§ Dual gauge routes.

§ Urban networks.

§ The TPI Railway and Port Agreement Route.


When arbitrating a dispute, the arbitrator is required to take account of a series of matters, but further is required to apply specified matters that are dictated by the Code and that have been determined by the regulator. Schedule 4 of the Code sets out in detail how the costs associated with rail infrastructure are to be assessed and what this implies for access prices, and relevantly provide that:

§ The access price for any segment of infrastructure must not exceed a ceiling, which is given by the price that is consistent with the asset owner recovering total cost across all users of that segment (clause 8 of Schedule 4).

§ As part of the further detailed guidance provided by the schedule, capital costs are required to be determined at Gross Replacement Value (clause 2(4) of Schedule 4), which is an equivalent concept to optimised replacement cost.

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Appendix F Cost standards This appendix provides further detail on the hypothetical new entrant and actual cost standards that could be employed in the pricing principles.

F.1 Hypothetical new entrant standard

The intention behind applying the hypothetical new entrant standard is to derive an estimate of the price that would be charged by a hypothetical new entrant provider of the services provided by the pipeline in question in a competitive market (or, more specifically, a perfectly contestable market). One justification for this standard is the proposition that it is reasonable for prices to be set at a level that reflects the outcome that would be observed in a competitive market. A second and more practical justification for the standard is that by setting prices at an estimate of the competitive market price, it is more compatible with encouraging actual new entry by competing facilities (i.e. in this case, direct competition between pipelines).

In a practical sense, applying this standard requires an estimate of the cost of constructing a new pipeline to provide the bundle of services provided by the pipeline, taking account of available modern technologies to provide the same service potential as the existing assets. This ‘optimised replacement cost’ may then be applied directly to derive the prices (in which case, the prices are determined assuming the pipeline is new, and hence having the life and expenditure associated with a new asset). Alternatively, the asset value may be adjusted to reflect the higher cost / shorter life of the actual pipeline to derive a ‘depreciated optimised replacement cost’ and prices are determined consistently with expenditure and life of the “old” asset. The choice between assuming a “new” or “old” asset should not (in principal at least) affect the price derived.

The practical steps required to derive a hypothetical new entrant price yield the third key benefit, which is that the method allows a price to be derived for any period that depends only on currently available information. That is, all that is required is information on the stock of assets in place, and their condition (that is, expected remaining life). There is therefore no requirement to inquire into the timing and quantum of expenditures and/or revenues received and similarly no requirement to keep accurate accounts over time.

However, there are a number of disadvantages with applying the new entrant cost standard. First, central to the application of the standard is the requirement to estimate the cost of installing an asset today that has the same service potential as the asset in question, which includes due allowance for the specific construction conditions for the asset (i.e., topography and ground conditions). An assumption would also be required as to the extent of optimisation that would be possible. Past experience suggest that such estimates have substantial imprecision, and so would be likely to generate a high potential for disagreement between the parties. One option to address this potential would be to require

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the AER to develop a guideline that provides further guidance on the estimation (and re-estimation) of the optimised replacement costs.259

Secondly, while the focus of the method is to provide an estimate of the reasonable level of prices at any point in time, an outworking of the method is that it generates a particular recovery profile (i.e. depreciation method) for costs over time. That is, if the method is applied correctly,260 capital costs will be recovered over time in a manner consistent with how those costs would have been recovered in a hypothetical competitive market. There are two key implications of this.

§ Looking backwards, the method does not permit an inquiry into the costs that have been recovered over the period to date. Rather, past period recoveries are just assumed to have consistent with what would have occurred in a competitive market. This may provide a windfall gain to pipeline operators, but in some circumstances could equally provide a windfall loss.

§ Looking forwards, the method may assume a pattern of cost recovery (i.e., time profile of tariffs) that is not consistent with the efficient growth in the market. Specifically, the hypothetical new entrant standard may encourage prices to be higher than desirable for pipelines that start with low utilisation and where this is expected to grow.

Thirdly, as the hypothetical new entrant standard results in prices that are independent of cost, it need not deliver incremental revenue when assets are augmented that will cover the incremental cost and so may not support new investment. Indeed, if the method were applied strictly, then a bias may be created against new investment.261 This concern could be address by modifying the degree of optimisation performed when reapplying the method over time, albeit with additional complexity and room for dispute.

Fourthly, application of the hypothetical new entrant standard requires an estimate of both current day optimised costs, as well as a forecast of how the optimised costs are likely to change over time, with the forecast change in replacement costs factored into current period prices. Any error in the forecast change in replacement cost will generate a windfall gain or loss that may be material. This adds a further potential for dispute in the application of the hypothetical new entrant standard.

259 As noted above, the information disclosure / price monitoring regime that applied to electricity networks in New Zealand in the 1990s required asset values to be stated at optimised deprival value (which was essentially the optimised depreciated replacement cost). A detailed guideline was developed by the Ministry for Economic Development (and later updated by the Commerce Commission) to guide these estimates. The guideline included such matters as standard replacement costs for particular types of assets and standard asset lives.

260 A correct application of the method means applying the method in a manner that generates a stream of revenue over time that (in present value terms) equates to the hypothetical new entrant’s costs. Thus, if the replacement cost is expected to increase at a rate of 5 per cent per annum, then this “revaluation gain” would need to be factored into the determination of prices in the current period.

261 This bias results because the actual cost of expanding a pipeline from serving one level of demand to a higher level of demand will typically be greater (and cannot be less than) than the difference between the cost of the hypothetical assets that are optimised for the respective levels of demand.

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F.2 Actual cost standard

The key contrast of the actual cost standard is that the room for debate about the re-application of the standard over time is much reduced. The asset value is increased to reflect new capital expenditure and is reduced to reflect the extent of the cost that has been recovered through prices (depreciation), both of which can be known and/or measurable quantities. In addition, by having a direct link between the measured cost and actual costs incurred then:

§ from the perspective of buyers, there should be a greater confidence that in the reasonableness of the prices produced, and

§ from the perspective of sellers, there should be reduced prospect that efficient new investment would be made uncommercial.

In addition, the actual cost standard provides some flexibility as to how costs are to be recovered (depreciated) over time. A faster or slower rate of recovery will result in a higher or lower measured cost for any given period; however, this choice would be reflected in the asset value left to be recovered at the end of the period in question.

However, applying the actual cost standard will require a starting point for the asset value to be determined. Unlike the hypothetical new entrant standard – where a unique outcome for the starting asset value is inherent in the method – the setting of the starting asset value will be an issue that is central to the application of the actual cost standard. Moreover, in equivalent settings, the setting of the asset value for pre-existing assets part way through their lives has typically generated substantial debate and controversy.

The reason for this controversy rests in the fact that, for assets that have been in place for some time, even if there were good records as to the amount of historical capital expenditure it would be a very difficult to ascertain the extent of cost that has been, or that should be assumed to have been, recovered over the period to date. The High Court of New Zealand (when hearing a merit review of a Commerce Commission decision) commented on this matter as follows:262

[583] Clearly, it would be consistent with the roll-forward provisions if initial RAB values were to be determined in the same way – if initial RAB values were set so that the assets existing at the start of the new regime earned NPV=0 over their whole lives. There appears to be little or no disagreement among the parties that this would be appropriate, were it possible. However, it is also agreed to present insuperable difficulties of implementation. Perhaps over-simplifying, two pieces of information would be needed:

(a) the actual costs of all investments that have entered into the initial RAB at the time it is to be estimated (the start of the new regime, more precisely the beginning of the first year in which a price-quality path is to be set or the new ID requirements are to apply); and

(b) all revenues earned over that whole period.

262 Wellington International Airport Ltd & Ors v. Commerce Commission [2013] NZHC [11 December 2013], paras.583-584.

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[584] The impossibility of this task lies behind the comment frequently made that applying the NPV=0 principle to assets part way through their lives is difficult.

Where the actual cost standard is applied, it is typical for the starting value to be determined at a value that is found to be objectively reasonable, in the context of the asset in question. There are cases where the starting value has been based upon past costs incurred and an estimate of the recovery of those costs to date. However, there are also a large number of cases where the ‘depreciated optimised replacement cost’ method has been applied (or where this has been applied as the starting point, with adjustments then made), which effectively means applying the “hypothetical new entrant” just to set the starting point for the new regime and then treating this as a deemed historical cost. Clearly, given this scope for dispute, further guidance for the arbitrator for setting the initial asset value may be important.

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