The Australian Competition Tribunal has created new competition benchmarks in its review of the ACCC decision on AGLs natural gas supply arrangements from the Cooper Basin in SA to NSW, ACCC Deputy Chairman, Mr Allan Asher, said today.
"In its determination, the Tribunal found that the First Right of Refusal clause in the arrangements 'is quite independent of the other clauses'," Mr Asher said. "It had obvious anti-competitive effects, compelling AGL to disclose competitive offers to the producers, thereby inhibiting alternative suppliers from disclosing their hand."
"The Tribunal also found that there are nowadays more economically efficient ways than take-or-pay and exclusive dealing to cover the necessary future cash flows for such a project, in particular, the use of a two-part tariff."
The Tribunal found that there had been a 'material change of circumstances' since the original authorisation but, given the relatively short remaining duration of the contracts and the benefits to the community achieved over the life of the contracts, it would allow the authorisation to continue.
AGL has a 30-year supply contract, which will expire in 2006. The contract contains provisions that prevent AGL from purchasing gas from alternative suppliers during that term.
The Tribunal found that, stemming from National Competition Policy, circumstances in the market had materially changed since the authorisation was granted in 1986.
The Tribunal did not judge whether or not 30 years was excessive, but expressed the views that "there must be a trade-off with other elements of such a contract", that "a less restrictive contract would have sufficed, and would suffice today, to yield the benefit to the public" and that "significant detriment would result from a continuation of the Letter of Agreement to the end of its thirty year term".
"The Tribunal authorised these restrictive clauses on the basis that they were a product of their time, that the contract had given rise to continuing benefits in sustaining substantial investments, and it looked at the sum of the parts, rather than individual provisions in finding the final balance in favour of maintaining the authorisation.
Commenting on the significance of the decision, Mr Asher said "Any new investments in the gas industry will need to fully take account of the Tribunal's pro-competition stance."
Mr Asher pointed to a concluding comment in the Tribunal's decision that 'in todays more sophisticated financial environment, where preferable contractual devices that serve the same end are available and in common use, provisions such as typified by clauses 18 [take-or-pay] and 20 [exclusive dealing] in the Letter of Agreement might well be considered unacceptable'.
"Moreover, the Tribunal has identified upstream competition barriers as a force that may limit the prospects for effective competition intended by the COAG competition and gas policy reform program. All who are interested in bringing about free and fair trade in gas, especially consumers, should note the following comments in the Tribunal decision:
'There is much common ownership of leases for exploration and production in the gas fields. Ordinary commercial sense indicates that ring-fencing arrangements are quite compatible with an awareness of common interests. There are large economies of scale in the development of reserves and the building of pipelines that will restrict the number of viable enterprises. While new players can play a useful role in developing financial instruments and participating in secondary markets, the final outcome for consumers of gas will depend to a considerable extent on the extent to which competition develops between producers of gas, for it is they who control the initial supply, though competition downstream would certainly squeeze subsequent costs and margins.' "
For further information about this media release: Mr Allan Asher, Deputy Chairman, (02) 6264 2838
"In its determination, the Tribunal found that the First Right of Refusal clause in the arrangements 'is quite independent of the other clauses'," Mr Asher said. "It had obvious anti-competitive effects, compelling AGL to disclose competitive offers to the producers, thereby inhibiting alternative suppliers from disclosing their hand."
"The Tribunal also found that there are nowadays more economically efficient ways than take-or-pay and exclusive dealing to cover the necessary future cash flows for such a project, in particular, the use of a two-part tariff."
The Tribunal found that there had been a 'material change of circumstances' since the original authorisation but, given the relatively short remaining duration of the contracts and the benefits to the community achieved over the life of the contracts, it would allow the authorisation to continue.
AGL has a 30-year supply contract, which will expire in 2006. The contract contains provisions that prevent AGL from purchasing gas from alternative suppliers during that term.
The Tribunal found that, stemming from National Competition Policy, circumstances in the market had materially changed since the authorisation was granted in 1986.
The Tribunal did not judge whether or not 30 years was excessive, but expressed the views that "there must be a trade-off with other elements of such a contract", that "a less restrictive contract would have sufficed, and would suffice today, to yield the benefit to the public" and that "significant detriment would result from a continuation of the Letter of Agreement to the end of its thirty year term".
"The Tribunal authorised these restrictive clauses on the basis that they were a product of their time, that the contract had given rise to continuing benefits in sustaining substantial investments, and it looked at the sum of the parts, rather than individual provisions in finding the final balance in favour of maintaining the authorisation.
Commenting on the significance of the decision, Mr Asher said "Any new investments in the gas industry will need to fully take account of the Tribunal's pro-competition stance."
Mr Asher pointed to a concluding comment in the Tribunal's decision that 'in todays more sophisticated financial environment, where preferable contractual devices that serve the same end are available and in common use, provisions such as typified by clauses 18 [take-or-pay] and 20 [exclusive dealing] in the Letter of Agreement might well be considered unacceptable'.
"Moreover, the Tribunal has identified upstream competition barriers as a force that may limit the prospects for effective competition intended by the COAG competition and gas policy reform program. All who are interested in bringing about free and fair trade in gas, especially consumers, should note the following comments in the Tribunal decision:
'There is much common ownership of leases for exploration and production in the gas fields. Ordinary commercial sense indicates that ring-fencing arrangements are quite compatible with an awareness of common interests. There are large economies of scale in the development of reserves and the building of pipelines that will restrict the number of viable enterprises. While new players can play a useful role in developing financial instruments and participating in secondary markets, the final outcome for consumers of gas will depend to a considerable extent on the extent to which competition develops between producers of gas, for it is they who control the initial supply, though competition downstream would certainly squeeze subsequent costs and margins.' "
For further information about this media release: Mr Allan Asher, Deputy Chairman, (02) 6264 2838