Exposure draft of gas market code of conduct released + price cap extended to 2025

The Federal Government has released its proposed Mandatory Code of Conduct for the East Coast Gas Market (Draft Code).

The Draft Code was released yesterday, together with a consultation paper, and includes details of how the government intends to regulate wholesale gas market pricing on the east coast moving forward.

The Draft Code is expected to be finalised and take effect by early June 2023.

A brief summary of key points is below. 

Key Points

• The gas price cap is proposed to continue indefinitely under the Draft Code – set at $12 initially. The $12 price cap is reviewable by the ACCC every 2 years, or sooner if there is a substantial change in market conditions or the Minister requests.

• Importantly, the cap does not apply to:
  • agreements to supply gas entered into before the emergency price order made in December 2022, which initially imposed the $12 cap; or
  • agreements to supply gas made prior to commencement of the Draft Code which relate to a period not covered by the emergency price order e.g. an agreement made in January 2023 for supply in calendar year 2024.

The Draft Code otherwise sets out detailed transitional provisions relating to application of the cap, expression of interest (EOI) processes and good faith requirements.

• In setting the cap, the ACCC may take into account:
  • the extent to which the price would promote;
    • a workably competitive gas market;
    • the affordability and availability of gas; and
    • the sufficiency or adequacy of investment in, and production of, gas; and
  • the effect or expected effect of other related decisions or government policies.

• The extended cap replaces the previous proposal for binding arbitration.

• The extended cap targets large gas producers:
  • Small producers (under 100 PJs per annum) who exclusively supply the domestic market will be automatically exempt. 
  • All producers (including large producers) may apply for exemptions from the cap if they negotiate enforceable domestic supply commitments. The government notes ACCC reporting that the 5 major producers are responsible for 85% of supply.

• The extended cap, removal of the arbitration proposal and introduction of the exemption regime are intended to provide more certainty to producers and unlock further investment in new supply. The exemption regime appears key to this, providing a basis for bilateral negotiations between producers and government on pricing to support new projects or brownfield expansion. New projects may – in practice – become conditional on the agreement of exemptions which balance domestic supply against pricing. Gas companies may also take into account the recent changes to the safeguard mechanism and rumoured changes to PRRT (where relevant) as part of determining the level of price support required.

• Importantly, the Draft Code provides scope for revocation of exemptions and so it remains to be seen how effective the exemption regime will be or whether further reform is needed to provide confidence to industry to invest.

• Detailed ‘conduct provisions’ dealing with processes for EOIs (for supplies of 12 months or more) and good faith will support gas buyers in negotiations (limiting the scope for withdrawal or changes in initial and final offers) and throughout the life of gas supply arrangements. The consultation seeks comments on the practicality of these provisions.

• While the Draft Code sets out detailed conduct provisions, it stops short of requiring gas producers to undertake EOIs or to award contracts where EOIs are run. However, where EOIs are run and initial offers made, it does make it substantially more difficult for producers not to enter into final contracts with buyers.

• The key binding obligation on producers relating to availability of supply is to publish details of quantities of uncontracted gas and proposed EOIs on a semi-annual basis. This will provide buyers with greater visibility as to gas which may be available for purchase.

• Otherwise, the design of the cap remains largely unchanged:
  • east coast gas only
  • pre 23 December 2022 contracts remain grandfathered
  • STTM, DWGM and Gas Exchange exclusions maintained
  • wholesale only – though a retail code is flagged as a possibility if wholesale prices are not passed through
  • significant penalties for non-compliance remain – maximum set at greater of $50m, 3 x gain or 30% of adjusted turnover
  • deemed exemption for gas to be exported in a liquid state

• The industry has a short period to respond to the consultation on the Draft Code:
  • 8 May 2023 – large gas producers are asked to make submissions on supply and price commitments they would offer to obtain exemptions.
  • 12 May 2023 – closure of the consultation generally.

• The Minister for Climate Change and Energy and Minister for Resources are required to order a review of the code by no later than 1 July 2025.

The Draft Code and consultation paper are available here. Our previous alert on the price cap and proposed code is available here.

Please contact Tim, Vishal or Craig if you would like any further information on this matter.