Transcript
Check against delivery.
Introduction
I’d like to begin by acknowledging the Traditional Custodians of the land we are meeting on today, the Wurundjeri people of the Kulin Nation, who have never ceded this land.
I pay my respects to them and their cultures, and to their Elders past, present, and emerging. I acknowledge their continuing connection to the land, sea and community.
I would also like to acknowledge and pay my respects to Aboriginal and Torres Strait Islander people who are attending this conference.
Thank you to the Energy and Resources Law Association for the opportunity to speak at this event.
Many people who work in the energy sector will remember 2022 as the year that Russia's invasion of Ukraine ignited a global energy crisis. Although energy prices in Australia are still high, I hope that this time next year we will remember 2023 as the year that Australia successfully mitigated an energy crisis and made some key regulatory improvements.
The ACCC has important monitoring, reporting and enforcement roles in both retail electricity and wholesale gas markets, but I’m going to focus my presentation today on the east coast gas market – particularly the new Gas Market Code which commenced only very recently.
ACCC’s role in gas markets
The ACCC has been conducting a wide-ranging gas inquiry since 2017, and last year the Australian Government extended this role through to 2030. Our inquiry is principally focused on the price and availability of gas supply, and the volume of gas exported compared to the volume available for local demand on the east coast.
As many of you would know, late last year the Government introduced an emergency price cap on the sale of wholesale gas by producers, which we are responsible for enforcing. Around the same time, the Government also began consulting on a mandatory gas code of conduct.
In July this year, a new Gas Market Code commenced with a two-month transition period for the gas industry to prepare for some of the new obligations that the code established. We are also responsible for enforcing the code, including compliance with the conditions of any ministerial exemptions and various reporting functions.
I will come back to the code in more detail in a moment, but before I do I want to talk about the gas supply outlook and the contracting experience of commercial and industrial gas users because they are central to the Government’s intervention in this market.
Domestic outlook
We have reported extensively in recent years on the worsening supply outlook for Australia’s east coast gas market. Our inquiry reports have repeatedly warned about the risk of gas supply shortfalls in the domestic market without LNG producers committing additional gas to the domestic market.
Because of this risk, the Government asked us to supplement our extensive half-yearly reports in December and June by adding focused quarterly reporting on gas supply in September and March, for the quarter ahead. This is to support the Minister’s decision making on the Australian Domestic Gas Security Mechanism, or ADGSM.
While our most recent report in June this year forecast an overall surplus for next year, it warned that the winter quarters will experience shortfalls unless the LNG producers commit additional gas to the domestic market. It also showed that the southern states will require gas from Queensland to avoid a shortfall next year.
More immediately, our June report forecast a shortfall of 14 PJ in the 3rd quarter of this year unless LNG producers committed additional gas to the domestic market via sales or swap contracts.
Our soon to be released September report will provide an updated forecast for the first quarter of 2024, drawing from data gathered before the code was finalised.
User experience
Many of our gas inquiry reports have had dedicated chapters on the experiences of Australia’s commercial and industrial gas users. To set the scene for the Government’s regulatory intervention in this market, I’d like to recap some of the information we received from users for our report in the middle of last year.
We were told about, and observed, a substantial jump in the price of offers, with prices in international markets translating into higher contract prices sooner than users had expected.
Users also told us that they faced increased risk of closure and long-term demand destruction due to much higher prices for contract offers and record high spot prices.
There were also concerns that the sort of supplier behaviour we’d described in our report six months earlier had intensified; users reported suppliers were unwilling to negotiate offers and were offering reduced flexibility in non-price terms.
We heard about concerns over the intent, legitimacy, and pricing mechanisms of certain supplier-initiated expressions of interest to the domestic market. Users also reported increased use of ACCC netback and JKM-linked prices in offers from suppliers, which were practices many hadn’t previously seen in the domestic market.
Consistently high prices in some spot markets resulted in AEMO imposing a price cap of $40/GJ in Brisbane, Sydney and Victoria due to unprecedented price increases and the exit of Weston Energy.
A few months later, the Government said it feared Australia’s manufacturing sector would be hollowed out, and by late-December it had legislated the emergency gas price cap.
Regulatory intervention
The emergency price order for the gas market set a $12/GJ price limit for gas sold by producers, and the ACCC was tasked with enforcing these new laws.
To assist gas producers, we developed and later revised compliance and enforcement guidelines on the price order, and explaining how we would exercise our enforcement role.
We also made decisions on several applications for exemption from the price cap earlier this year. In doing so, we carefully considered whether granting exemptions would be likely to undermine the objective of the order.
Pleasingly, our monitoring of producer pricing behaviour so far indicates very high levels of compliance with the price cap.
Our most recent June report showed that several commercial and industrial gas users stated that prices offered for firm gas supply agreements fell after the price cap had come into force. Prices quoted to them for supply in 2023-24 fell from up to $65/GJ prior to the price cap, to around $19/GJ in April 2023.
Unfortunately, however, gas users also told us they received fewer offers for supply in 2023-25, and some didn’t receive any offers at all. Several users suggested that suppliers may have been withholding or delaying making offers for 2024 supply until there was greater clarity around the operation of the mandatory code. Some also noted reduced supply impacting retailer behaviour.
As well as fewer offers for supply, users also reported a deterioration in contract flexibility and selling practices, with several noting that suppliers were less willing to negotiate on non-price terms such as contract length, take-or-pay provisions, and delivery points.
Which brings us to the new mandatory Gas Market Code.
Gas Market Code
The code is intended to facilitate a well-functioning domestic wholesale gas market with adequate gas supply at reasonable prices and on reasonable terms for both suppliers and buyers.
The code includes a $12/GJ price cap, and minimum conduct, process and transparency obligations that together support good faith negotiations to allow gas producers and users to enter supply agreements on reasonable terms.
Importantly, the code also contains an exemptions framework that’s designed to incentivise producers to commit more gas to the east coast market. The framework allows Government ministers to grant producers an exemption from the code, including in circumstances where the ministers are satisfied with producers’ voluntary but enforceable commitments to supply gas to domestic users.
We are responsible for monitoring and enforcing the code, including compliance with any conditions included in a ministerial exemption. Our role includes maintaining a regular reporting framework, as well as publishing information relating to the small supplier exemption and details of any conditional exemptions granted by the minsters.
There are three tiers of pecuniary penalties for companies that breach the code. The maximum penalty is up to the greater of $50 million or three times the value of the benefit obtained, or, if that value cannot be determined, 30 per cent of the company’s turnover during the period it engaged in the conduct.
Requirements relating to compliance with the price cap, good faith negotiations and avoidance schemes, as well as the conditions attached to any ministerial exemptions, will attract the highest penalties as they are most critical to the code’s effective functioning.
Last month, we released compliance and enforcement guidelines on the code summarising the key requirements, available exemptions, the prohibition on avoidance schemes and consequences for non-compliance, including the penalty regime.
As many, if not most, of you in the audience are practicing in the energy sector, I will use the opportunity to plug our guidelines and say that they are easily available on our website, alongside details on how gas companies and users can report suspected breaches of the code. Shortly we will be adding an additional contact point for anyone who wishes to contact us on an anonymous basis, for example, to provide information about attempts to circumvent the price order or code.
I’d also like to acknowledge the very important role that legal advisors play in assisting gas producers with regulatory compliance, which will support the effective operation of this new code of conduct.
As well as compliance with the code’s price rules and transparency and reporting obligations, we expect to see evidence of good faith negotiations between gas suppliers and users. Our expectation is that parties will act honestly, fairly, and reasonably while having regard to the rights and interests of the other party.
Data collection
The code’s record keeping and reporting rules include a new approach to collecting data from gas producers, which we believe is beneficial to both the gas industry and ACCC.
I acknowledge that the information requests that we’ve previously relied on have imposed a burden on gas companies, as well as the ACCC. We welcome the code’s record keeping and reporting rules that allow us to set out the specific information that we require gas companies to keep and periodically provide to us.
We recently released a reporting guide and forms, and will shortly begin a consultation on determinations under the code in relation to record keeping, reporting and publication requirements. Any future changes to these determinations will also require consultation.
This new approach provides greater clarity to companies about what the ACCC will be seeking and when, which we expect will allow the gas industry to invest in their compliance processes with greater certainty.
The changes also benefit us as they allow us to reallocate resources away from preparing information requests to analysing the operation of the market.
Market behaviour
Having talked in some detail about the market conditions and user experience that led to the Government’s intervention, I think it’s worth reflecting on what a workably competitive east coast gas market looks like.
That is, if this regulatory intervention is to be time limited, what will it take to shift the gas market to one that has sufficient, competitive, domestic supply?
The ACCC closely examined upstream competition in the east coast market last year, and we found that sufficient supply in both the short and long term is critically dependent on measures to improve competition and encourage the timely supply of gas.
A well-supplied domestic market is more likely to generate competitive price pressure and therefore meet the needs of domestic gas users. We saw this with the onset of COVID-19 in early 2020 when LNG producers had more available gas to supply to the domestic market, which led to increased competitive pressure and lower domestic prices.
Our electricity market has also experienced the consequences of insufficient domestic gas supply and ineffective upstream competition. The gas supply shortage in the middle of last year led to gas spot prices more than doubling, and along with other factors this triggered huge volatility in the national electricity market. This was caused by higher than forecast demand from gas powered generation, higher demand for LNG exports and lower gas production from several supply sources.
Additional and more diverse supply is therefore required to address the immediate risk of shortages, and to promote more competitive gas supply. We believe this would be best achieved through additional investment from domestic gas suppliers, in addition to the Queensland LNG producers making their excess uncontracted gas available to the domestic market.
But, of course, this is not what the east coast gas market currently looks like, and the new code and its exemptions framework were developed to incentivise producers to supply additional gas to the domestic market.
Importantly, the Australian Government has other policy tools to increase domestic supply at its disposal as well – namely the Australian Domestic Gas Supply Mechanism and the Heads of Agreement with the Queensland LNG producers.
Evaluating the code
As well as enforcing the new Gas Market Code, the ACCC will also be monitoring and reporting on its effectiveness in the domestic gas market.
However, it will take time for the code’s impact to flow through to the information that appears in our inquiry reports. For example, our report in December this year will provide an update on market conditions and supply and pricing expectations for 2024, but the data that we’ll analyse for this report will predate the implementation of the code.
In addition to our regular gas market reporting, the code will be reviewed in 2025. This review in two years’ time will be an opportunity to reflect on the operation of the market and the code’s impact on that.
Specifically, whether it’s meeting the respective interests of gas producers and users, is delivering sufficient domestic supply at reasonable prices, and is underpinned by transparent, good faith, commercial contracting. Our monitoring of practices over this period will inform this review.
At the same time, there is an opportunity to review whether $12/GJ remains the most appropriate reasonable price anchor in the code. Again, the practices that unfold over this period will inform this review, as will detailed analysis of the broader economic context and costs at this time.
Retailer insights
There has been some discussion and commentary recently about gas retailers being excluded from the code. We flagged in our most recent gas inquiry report that we’ve commenced a review of retailer behaviour, and our review will be conducted in two stages.
Stage one will focus on the conduct of retailers engaging with commercial and industrial users. Stage two will examine whether the prices being offered by retailers to commercial and industrial users is reflective of their costs, as well as factors that may be influencing retailer pricing behaviour.
This ACCC review was prompted by concerns that gas users raised with us about their experiences with retailers, both in terms of the manner of their negotiations for supply, and the prices being offered.
If our review identifies systemic issues with retailer conduct or pricing behaviour, we may make policy recommendations to Government to address these issues.
Conclusion
When the Australian Government introduced the draft Gas Market Code for consultation, it said that the code’s central objective is to facilitate a well-functioning domestic east coast gas market with adequate supply at reasonable prices and on reasonable terms.
The ACCC is steadfastly committed to this objective and as the regulator enforcing the new code, we will use our full investigative and enforcement powers in response to any alleged contraventions or attempts to circumvent the code’s obligations.
The gas industry is now operating in a new regulatory environment, and I would strongly encourage those of you who provide legal advice to gas companies to assist them to put strong compliance programs and practices in place, and to promptly report any potential breaches to the ACCC.
Competitively priced energy is absolutely critical to Australian industries and consumers, and when the code is reviewed the Government will be looking for evidence of a workably competitive domestic gas market.
Thank you for the opportunity to speak here today. I’m now happy to take any questions that you might have.