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Client Update: ACCC inquiry into the east coast gas market – key findings and recommendations

22 April 2016

In brief: The final report of the ACCC inquiry into the east coast gas market was released today. The ACCC has made recommendations about removing government moratoria on gas developments, revising the test to determine when a pipeline should be regulated and increasing consistency and transparency in information provided to the market. Partner Ted Hill (view CV) and Law Graduate Darcy McLennan report.

How does it affect you?

In its final report, the ACCC recommends:

  • that blanket government moratoria on gas developments be replaced with case-by-case consideration and that a domestic gas reservation policy should not be introduced;
  • that government revise the criteria for the regulation of pipelines, increasing the likelihood of pipelines with market power being regulated; and
  • that there be increased consistency and transparency in information provided to the market. All producers should publish consistent reserves and resources statements and AEMC should publish monthly LNG netback prices at Wallumbilla.

It remains to be seen how governments will respond.

Gas supply

Key findingsACCC recommendations/future work

The east coast gas market has been hit by what Rod Sims called 'a triple whammy':

  • Gas is flowing to the Gladstone LNG projects, which is removing gas from the domestic market and exposing customers to international gas pricing.
  • Moratoria and regulatory restrictions are adversely affecting onshore gas exploration and development.
  • The low oil price is resulting in declining investment in gas exploration and development.

The ACCC's recommendations seek to encourage new gas supply to come to the market:

  • A domestic gas reservation policy should not be introduced, given the likely detrimental effect on new developments.
  • Governments should consider adopting regulatory regimes to manage the risks of individual supply projects on a case-by-case basis, rather than using blanket moratoria.

The ACCC will also consider the competitive effect of the joint marketing arrangements of the Gippsland Basin joint venture in light of current market dynamics.

Pipeline regulation

Key findingsACCC recommendations/future work

Less than 20 per cent of transmission pipelines on the east coast are currently subject to regulation, in contrast with comparable jurisdictions such as the US, the European Union and New Zealand.

There is evidence that a large number of pipeline operators have been pricing above the level they would be able to charge in a competitive market or if the pipelines were regulated. The threat of regulation has not been an effective constraint on monopoly pricing.

A pipeline can only become regulated under the current national gas regime (NGR) if regulation would promote competition in an upstream or downstream market. This 'coverage' test is aligned to Part IIIA of the Competition and Consumer Act 2010 (Cth) (the CCA) and is designed to identify bottleneck essential facilities, rather than prevent monopoly pricing. In the ACCC's view, monopoly pricing of gas pipelines has the potential to adversely affect investment in new production and to dampen gas demand from consumers.

These conclusions reflect a broader ACCC concern about the ability of Part IIIA and the NGR to constrain pricing by the owners of natural monopoly infrastructure.

The ACCC recommended to the COAG Energy Council that the NGR should be amended so that pipelines would be regulated if:

  • the pipeline in question has substantial market power;
  • it is likely that the pipeline will continue to have substantial market power in the medium term; and
  • coverage will, or is likely to, contribute to the achievement of the National Gas Objective (promoting efficient investment in, and operation and use of, natural gas services for the long-term interests of consumers).

The COAG Energy Council should ask the AEMC to carry out further consultation on matters to be considered when applying this test.

AEMC should review the NGR to ensure that regulated pipelines are not able to unduly exercise market power. The ACCC is concerned that expansions and the provision of certain non-contestable add-on services may not be fully regulated. The AEMC should also consider whether changes can be made to the dispute resolution mechanism in the NGR to make it more accessible to shippers.

Market operation and transparency

Key findingsACCC recommendations/future work

There is a lack of transparency and consistency in the reporting of reserves and resources. Gas users lack clear insight into actual reserve positions and expected future production outputs.

All explorers and producers, including non-ASX listed companies, should report consistent reserve and resource information. Reporting should be based on common price assumptions in the calculation of reserves and resources.

Information about gas prices is partial, provisional and mostly private. Gas pricing information gaps create a disparity in bargaining power in the market.

AEMO should develop and publish a clearly explained monthly LNG netback price to Wallumbilla. LNG netback would be calculated taking the LNG export price and subtracting the cost of shipping, liquefaction and transmission.

The AEMC should consider requiring AEMO or the AER to publish a periodic price series of actual commodity gas prices paid to producers.

The LNG gas specification required by LNG projects is different to the specification required by other gas users. This difference has the potential to impede the free flow of gas and bifurcate the market.

The COAG Energy Council should monitor the issue of separate gas specifications to aid the free flow of gas across the east coast gas market.

Transportation capacity and hub services can be further unlocked to increase efficient use.

The AEMC should consider requiring the introduction of a centralised trading platform for pipeline capacity, day-ahead auctioning of unused capacity, and hub services.

The ACCC found evidence that capacity is being withheld by incumbents on some regional pipelines. In particular, retailers on regional pipelines may have been making it harder for users to obtain or accept commodity gas offers from other retailers, or for other suppliers to make offers, including by not offering stand-alone transport capacity when sought. The ACCC will consider whether the availability or pricing of capacity on regional pipelines raises any concerns as a breach of the misuse of market power provisions or the exclusive dealing provisions of the CCA.

Next steps

The ACCC's report has been provided to Kelly O'Dwyer, the Minister for Small Business and Assistant Treasurer. We would expect government to issue a response to the report in the near future.

The AEMC is currently conducting its own East Coast Wholesale Gas Market and Pipeline Frameworks Review. AEMC is due to report in May 2016.

Most of the ACCC's recommendations require action by the federal, state and territory governments through the COAG Energy Council, or by AEMO and AEMC. We expect that most of the recommendations, notably the recommendation to change the criteria for gas pipeline regulation, would be the subject of further consultation before being implemented.

 

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