APA Group, meanwhile, has come out swinging against the Australian Competition and Consumer Commission's recommendation of further pipeline regulation which the Council of Australian Governments is now pursuing.

"The ACCC's approach is inconsistent with the current regulatory regime and regulatory practice. It is difficult to understand why the ACCC has given this argument any oxygen, apart from needing to be seen to be doing something," APA managing director Mick McCormack said in the group's submission to the consultation paper of Dr Michael Vertigan, who is leading a market review for COAG.

"To use a simple analogy, just because the capital costs of an old office building have been recovered, it does not mean tenants are at that point only charged outgoings," McCormack said.

"Imagine the outcry if this were legislated, and applied to all infrastructure be it gas pipelines, gas networks, or electricity poles and wires - the economic impact to investors in that infrastructure would run to billions of dollars evaporating overnight."

In his own submission to Dr Vertigan's inquiry issued yesterday, Cottee said the ACCC had it right -the pipeline system does not operate as a market and is actually suppressing pricing signals, enabling pipeliners to hoover up the profits at the expense of gas suppliers.

The proof of this monopoly, he says, are the gas shortage on the east coast and the lack of a corresponding stimulus in the upstream gas supply market; the massive price increase in the gas demand centres of the southeast in particular; and the super-profits made by pipeline owners.

He believes the increase in east coast gas prices and the gas shortages are not because of the bans on drilling in Victoria and New South Wales but a long-standing system where pipelines have been operating under-regulated.

McCormack insisted yesterday that domestic gas prices were affected by the internationalisation of the commodity via the LNG projects in Queensland.

"Central Petroleum contends that, in reality, the east coast gas transmission network does not operate as a competitive market, inadequately carries price signals, leading to genuine gas shortages which threatens high gas prices in major demand centres and has been extremely damaging to investment decisions in both upstream (supply) and downstream (manufacturing) industries," Cottee said.

Meanwhile the pipeline owners have had "incredibly strong performance unmatched by the performance of either the upstream or downstream sector", he added.

APA, which also made its submission to Dr Vertigan's inquiry yesterday, confirmed in August a 19.2% compound return over the last 15 years, an extraordinary return, as far as gas producers are concerned.

Flawed report

APA's submission was that the ACCC proposed that pipeliners' rates of return on incremental projects were "excessive" and most of the projects cited involve small capital works projects to augment its pipelines, representing less than 1.25% of its enterprise value.

APA said that of its six incremental projects referenced in the ACCC report, three were developed as a competitive response to other projects and three involved making pipelines bidirectional in response to customer demand.

The group believes the ACCC's analysis is "flawed" as it "failed to take into account the value of the underlying pipeline, looking at the incremental investment on a stand-alone basis only".

Cottee believes pricing backhaul services in relation to the actual cost of service being provided would be a good start to get the market efficiencies needed.

He said backhaul services, which reduce the physical movement of gas between delivery point and increase the forward haul capacity of pipelines, was "fundamental in allowing an appropriate price signal to support a supply side response in locations that are located downstream of the pipeline network and therefore efficiently utilise the existing pipeline assets"

Cottee also believes all unused pipeline capacity on a day should be available to the market by way of auction, with a floor price referencing the actual cost of providing that incremental service.

"Excess pipeline capacity should not be horded or limited by owners or contractors to manipulate gas and access prices," he said.

To prevent future manipulation of regulatory objectives, Cottee backed transitional provisions such that, from the time COAG decides to progress its intended reforms, any pipeline asset transaction entered into before the regulations kick in is still subject to them.