Reform of the South Australian and Victorian gas industries is crucial to the future well being of the competitive environment, Australian Competition and Consumer Commission Deputy Chairman, Mr Allan Asher, told a Victorian gas reform conference today.
A failure to reform could, indeed, lead to the failure of the reform process as a whole, he said.
Releasing the ACCC's submission to the South Australian Governments review of that States Cooper Basin (Ratification) Act, Mr Asher said that the Act in particular was an "obstacle to gas users reaping the benefits of COAG's gas industry reform initiatives".
The Act exempts a number of gas production and supply agreements from competition. "It entrenches incumbent producers in a near-monopoly of supply to gas markets in NSW and South Australia and, by hindering the entry of new producers and other suppliers, it slows the evolution of the market to more competitive trading mechanisms, such as secondary and spot markets," he said.
"In contrast, free and fair trade in gas, if realised, would allow consumers and producers in any State or Territory to buy or sell gas anywhere else on normal commercial terms, leading to better use of gas resources, lowest possible prices, stimulus to exploration and the development of production, transmission and distribution facilities.
"A failure by the South Australian Government to reform the Ratification Act and to fully embrace competition principles adopted by the Council of Australian Governments may lead to a substantive failure of the entire reform process.
"The fundamental objective of the Ratification Act is to preserve a reliable supply of gas to consumers. This review provides the opportunity to South Australia to ensure that that objective is served by arrangements that foster upstream competition and interstate rivalry in supplying gas to consumers."
In the ACCCs view, South Australian and national interests will be best achieved by free flow of gas between States in response to commercial deals made in a competitive environment. This applies also to the Victorian situation where the reform of upstream production would expedite the competitive reforms in that State.
The ACCC recommended repeal of the exemptions of several agreements protected by the Ratification Act:
- the Letter of Agreement, which ties AGL to the Cooper Basin Producers and requires AGL to take gas at a single delivery point. In the ACCCs view, these provisions are an impediment to interstate trading and alternative sourcing of gas for SA and NSW consumers
- the Unit Agreement (an agreement to coordinate production arrangements across a number of blocks in the Subject Area of the SA Cooper Basin). Because the Unit Parties now operate their joint venture in conjunction with interests they hold outside the Subject Area, the Ratification Act exemption is outdated. The Unit Agreement appears to reinforce concentration of producer interests in the Cooper Basin and to be a potential barrier to separate marketing when feasible
- contracts for the sale of liquid hydrocarbon products. These products are now sourced from South Australian and Queensland regions of the Cooper Basin. The contracts include non-exempt parties and so the exemption, which allows the producers to set common terms of sale, is ineffective. The ACCC will assess public benefit arguments for the contracts under an existing authorisation application made to the ACCC
The ACCC has called on the SA Government to introduce measures to foster third-party access to upstream infrastructure:
- by legislation or by an enforceable code of conduct and
- by committing to extend concessionary terms associated with current exploration and production leases on an equal basis to new entrants to the Cooper Basin.
"These measures will mitigate the anticompetitive effects of the Unit Agreement and Indenture, which is an agreement between the State and the Producers providing for exemptions and certain rights and obligations.
"The ACCC reserves its position as to the overall merits of the Unit Agreement pending evaluation of public benefit arguments for it as part of relevant authorisation applications." The ACCC also recommended that the South Australian Government remove legislated limitations on Santos shareholdings, originally passed in 1979 to prevent Bond Corporation gaining 51% control of the company and consolidating it into the Bond group.
"Notwithstanding the legislations past purpose, leaving in place a protective device of this kind, with the potential strategic acquisitions advantages it confers on Santos, may carry costs - given industry concentration and the current absence of third-party access to essential upstream gas-gathering and processing facilities."
The ACCC recommendation addressed concerns and information made known by purchaser, user, financial, government, electricity supply and by gas producer interests in other basins. "Spokesmen for the National Competition Council and the gas industry have recently stressed the importance of continued and timely gas reform nationally," he said.
Mr Asher said that the ACCCs recommendations are consistent with the policy goals of COAG and would go some way to overcoming disincentives to exploration and production caused by existing contractual restrictions.
Further information Mr Allan Asher, Deputy Chairman, (06) 264 2838 Ms Lin Enright, Director, Public Relations, (06) 264 2808.