Key takeaways
The exposure drafts issued by the Federal Government reflect the establishment of a very broad regulatory framework through which the ACCC can regulate the supply and acquisition of gas.
While much of the focus has been on a 12 month temporary price cap of $12/GJ which will come into effect in December 2022, it only applies to new and varied contracts. Given many gas buyers have already contracted gas supply for 2023, its impact may be limited and depends on how much gas is available domestically. It nominally only applies to gas producers (although the operation and deeming provisions which capture affiliates means its reach may be broader than intended). In any case, it is not intended to prevent buyers from producers on-selling at higher prices.
Of greater importance is that the legislation permits the Government to introduce a long-term mandatory gas market code. The potential scope of the code is very broad, including being able to make gas market participants issue expressions of interest, make offers of supply and enter into agreements in specified circumstances. The code can include requirements as to gas volumes to be offered and the price.
The Government is proposing to introduce such a code. The proposed code would include a “reasonable pricing” provision which according to the Consultation Paper would reflect the cost of domestic gas production, allowing for a reasonable rate of return on capital. It is important to note that what is reasonable is not detailed in the Draft Bill but would be set out in the code. The code can also go further and set prices.
The code in effect would provide for the potential economic regulation of the acquisition and sale of gas and is not limited to producers. It can implement a publish / negotiate / arbitrate model whereby gas market participants must publish relevant information, negotiate with buyers and be subject to binding arbitration in case of disputes.
The legislation is, of course, merely facilitative and it is possible the code will be much narrower in operation. The code, which is not yet public, is proposed to come into effect in February 2023.
The operation of the code and the temporary price cap is buttressed by civil penalty provisions, infringement notices, ACCC information gathering powers, “name and shame” provisions and an anti-avoidance regime.
Overview
As part of its plan to address rising energy prices and promote the delivery of gas to domestic users at reasonable prices in Australia’s wholesale gas market, the Federal Government has issued an exposure draft of the Competition and Consumer Amendment (Gas Market) Bill 2022 (Draft Bill).
The Draft Bill gives the Federal Government the ability to implement long-term, mandatory “gas market codes” and temporary, mandatory “gas market emergency price orders”.
In the separate Consultation Paper and draft Ministerial order, the Federal Government has announced its intention to make a gas market emergency price order in December 2022 (Draft Order) and introduce a new gas market code (a draft of which is not publicly available) in February 2023 (Mandatory Code).
This alert summarises the overarching regulatory framework established by the Draft Bill and explores the key elements of the Draft Order and the Mandatory Code.
Regulatory framework
Purpose and key concepts
The Draft Bill permits the creation of “gas market instruments” which are:
- gas market codes prescribed by the regulations of the Competition and Consumer Act 2010 (Cth) (CCA); and
- gas market emergency price orders made by the Minister.
The Draft Bill, associated regulations and gas market emergency price orders apply to conduct, and the supply of gas, in and outside of Australia including the external Territories. It also applies to imports and exports of gas.
Some concepts which are critical to the Draft Bill include (in summary terms):
- “gas market conduct” – conduct relating to supplying or acquiring a gas commodity or the potential supply or acquisition of a gas commodity, with some examples (eg operating a gas exchange) – while the Explanatory Material suggests this is limited to conduct at the wholesale level, this is not clear from the face of the legislation;
- “gas commodity” - gas or “goods or services relating to supplying or acquiring gas” – a question is whether this would be broad enough to capture pipeline services and storage;
- “gas market participant” - a person who engages, or is capable of engaging, in gas market conduct, including persons who have done so in the past, body corporates and joint ventures. In an attempt to capture the many structures used in upstream gas, there are complex “affiliate” provisions which have the potential to capture entities further down the gas supply chain;
- “gas exchange” - an exchange or other trading system, platform or facility for trading gas and although the Consultation Paper suggests that neither the Draft Order nor the Mandatory Code would include the Victorian Declared Wholesale Gas Market and the Short Term Trading Markets, it is possible that gas market instruments could apply to them.
Gas market codes
Gas market codes may cover a broad range of matters, including the regulation of (among other things) gas market conduct; the terms on which gas commodities are supplied or acquired including in relation to price; and the operation of a gas exchange.
Gas market codes may also include rules relating to dispute resolution, including:
- requiring gas market participants to have specific internal and external dispute resolution processes in place; and
- processes for mediation and arbitration (including compulsory arbitration) of disputes between gas market participants.
Gas market emergency price orders
Gas market emergency price orders may include rules:
- about the terms on which a person offers to supply or acquire, agrees to supply or acquire, or supplies or acquires a gas commodity including terms relating to price; and
- regulating the operation of a gas exchange.
The emergency price order powers are temporary. Assuming the Minister makes the emergency price order in December 2022, the order and the ability to make an order will expire in 12 months, ie December 2023.
Transparency and scope of gas market instruments
The Draft Bill provides that a gas market instrument may cover a wide range of other matters, such as:
- transparency – rules about the publication of information by gas market participants and information provision between gas market participants;
- reporting, records and auditing – rules about reporting, generating or keeping records or auditing in relation to a gas market matter, including to the Minister or the ACCC;
- conferral of powers and functions – conferral of powers or functions on other persons, such as monitoring compliance with a gas market instrument and conducting investigations into a gas market matter;
- fees – rules about charging fees for anything done by or in relation to the Commonwealth, the ACCC or any other person in relation to a gas market instrument;
- cross-default – rules providing that in specific circumstances, a partner in a partnership or a person in a joint venture is taken to contravene a specified provision of a gas market instrument if their partner or joint venturer (as applicable) contravenes the relevant provision.
Compliance, enforcement and investigation
In relation to gas market instruments:
- civil penalties – gas market instrument may designate specific provisions as civil penalty provisions;
- infringement notices – ACCC may issue infringement notices as an alternative to commencing proceedings for alleged contraventions of specific rules (eg prohibition against entering into anti-avoidance scheme and information provision requirements);
- public warning notices – ACCC may give public warning notices to companies who engage in prohibited conduct where the ACCC considers it is in the public interest to issue the public notice. ACCC must give draft notice to company unless the ACCC reasonably believes that there is a significant risk of imminent, serious harm to the welfare of Australians and that a public notice is reasonably necessary to prevent or reduce the risk or seriousness of that harm;
- orders to redress loss or damage – the ACCC may apply for, and a court may issue (subject to specific criteria), an order against a person who engages in conduct which constitutes a contravention or related contravention of a civil penalty provision of a gas market instrument that causes or is likely to cause a class of person to suffer loss or damage;
- types of court orders – for the purpose of redressing loss or damage, a court may make orders declaring that a contract (or part thereof) is void; void ab initio (ie never had legal effect). The court is also given an explicit power to vary contracts;
- avoidance schemes – there is a general prohibition on entry into a scheme if the purpose is to avoid the application of a civil penalty provision;
- investigation powers – ACCC may require person to provide information or produce documents to the ACCC, and that person must not give the ACCC false or misleading information or documents which contain false or misleading information; and
- application to agreements – for the purposes of the provisions inserted by the Draft Bill, it does not matter whether an agreement was entered into before, on or after the commencement of the new provisions.
The Draft Bill would also extend the existing information gathering powers of the ACCC under section 155 by enabling it to serve section 155 notices to persons or entities outside Australia. This change is not limited to the gas market instruments, but would apply to all of the CCA provisions in relation to which the ACCC can currently issue section 155 notices.
Proposed policy measures
Draft Emergency Pricing Order
The Draft Order would apply:
- with a price cap of $12 per gigajoule (GJ) (on the advice of the ACCC) – it applies where the price could exceed or does exceed $12/GJ so may need to include consideration of other related or incorporated charges, including delivered gas prices and supply charges;
- during the “price cap period” being the period starting on the day which the Draft Order commences and ending 12 months after that day;
- to new agreements made during the price cap period or variations to agreements in that period, even if the agreement was entered into before the price cap period;
- to existing fields only, ie which commenced operation before the commencement of the Draft Order;
- only to the East Coast and not Western Australia or, for so long as the Northern Gas Pipeline is not operational, the Northern Territory;
- to “persons”, being a person carrying on a business of producing regulated gas (a producer) or where the person is an affiliate (including a related entity or joint venturer) of a producer and has entered into agreement for the supply of gas by the producer to that person.
A person contravenes the Draft Order and is subject to civil penalties if they enter into an agreement for the supply of regulated gas during the price cap period under which they will supply regulated gas during that period, and the price payable under the agreement could, or does, exceed the price cap.
There are exceptions to the Draft Order:
- the recipient of the gas intends to export it from Australia in a liquified state;
- the agreement is a subordinate contract under a master gas supply agreement which was entered into before the start of the price cap period and does not include a provision determining the price of the gas to be supplied under it;
- the agreement is a contract for the storage of regulated gas; or
- the cap does not apply to the Declared Wholesale Gas Market and Short Term Trading Markets but does apply to the Wallumbilla Supply Hub.
Mandatory Code
As noted in its separate Consultation Paper, the Federal Government intends to introduce a mandatory gas market code to which all domestic gas producers will be subject except for those in markets which are functionally separate from the eastern gas region.
The Mandatory Code will build on an existing, voluntary code and cover the following items:
- good faith obligations on producers and purchasers;
- requirements for producers to publish or make offers broadly available to the domestic market;
- obligations in relation to expressions of interest or making offers to enter into a gas contract, including:
- information disclosure (eg factors considered in determining price);
- timing (eg minimum periods for EOIs and offers to remain open);
- minimum standards for some terms and conditions in gas supply contracts;
- a formal process for the resolution of pre-contractual disputes including mediation and binding arbitration; and
- reasonable pricing provision (see below).
Of particular significance is the proposed “reasonable pricing provision”. It is defined in the Consultation Paper as “efficient long run marginal costs of domestic supply, allowing for a commercial return on capital reflective of the industry’s risk profile”.
The Consultation Paper provides the ACCC will assess what is a reasonable price with reference to the cost of the most likely new domestic gas production to meet forecast domestic demand, having regard to (in respect of the new development):
- operating expenditure;
- depreciation based on economic life;
- return on capital; and
- allowance for taxation and royalties.
The reasonable pricing requirement will apply to gas from currently undeveloped fields as soon as the Mandatory Code is introduced in early 2023. Gas from developed fields will be subject to the temporary price cap and then the reasonable pricing provision in the Mandatory Code after the temporary price cap has ended.
