New economic regulation of Australia’s East Coast gas market

On 15 December 2022 the Australian Government passed legislation designed to reduce domestic gas prices that dramatically reshapes Australia’s East Coast domestic gas market.

Gas producers will need to reassess their gas supply contracting and develop new systems to strictly comply with the new laws.

The Treasury Laws Amendment (Energy Price Relief Plan) Bill 2022 (Cth) (Bill) was passed at an emergency session of Parliament only six days after the announcement of the Government’s Energy Relief Package.  

The Bill will become the Treasury Laws Amendment (Energy Price Relief Plan) Act 2022 (Cth) (Act) once it receives Royal Assent, anticipated imminently.

The Act will insert a new Part IVBB to the Competition and Consumer Act 2010 (Cth) which introduces two major new instruments to Australia’s East Coast gas market:

Gas Market Emergency Price Orders;

and

Gas Market Codes.

It is anticipated that immediately following commencement of the Act the Treasurer will issue the Competition and Consumer (Gas Market Emergency Price) Order 2022 (Price Order) which imposes an AUD$12/GJ price cap on certain gas sales for 12 months.

No draft gas market code is yet in circulation but consultation on any proposed code is slated to end on 7 February 2023 and it is anticipated that the first mandatory gas market code (Mandatory Code) will come into effect shortly thereafter.  

It will for the first time impose a regulated price on the supply of wholesale gas to Australia’s East Coast market to be based on the efficient long run marginal costs of domestic supply, with some form of allowance for a commercial return on capital reflective of the gas industry’s risk profile.

Gas Market Emergency Price Orders

Gas market emergency price orders are legislative instruments that can be issued by the Treasurer to deal with:

the terms on which producers can offer to supply or acquire or agree to supply or acquire gas; and

the price at which gas can be supplied.

A sunset provision on gas market emergency orders of 12 months from the passage of the Act applies.

The Price Order is for the full 12 month period (Price Order Period) and imposes a $12/GJ price cap.  

It only applies to gas sold by a producer under a negotiated gas supply agreement entered into or varied within the Price Order Period with respect to gas to be supplied within the East Coast gas market during the Price Order Period from a field that was already producing at the time the Price Order is issued.

The Price Order only applies to East Coast gas supply, and so does not apply to supply in Western Australia or, for so long as the Northern Gas Pipeline is not operational, the Northern Territory.

It also does not apply to:

LNG exports;contracts entered into under master supply agreements (MSA) in place prior to the date of the Price Order and for which pricing was set under the MSA;gas storage agreements; or

transactions on a gas exchange (other than the Wallumbilla/Moomba Gas Supply Hub).

Given the long lead times typically involved in gas sales agreements, most gas supply for 2023 is already contracted, so it is anticipated that the Price Order will in fact cover only a small proportion of gas sales.

Gas Market Codes

The Act will permit the Government to pass regulations introducing so called mandatory gas market codes.

No draft gas market code is yet in circulation but consultation on a proposed gas market code is scheduled to close on 7 February 2023 and it is anticipated that the first Mandatory Code will come into effect shortly thereafter and will regulate gas sold after the end of the Price Order Period.

Gas market codes can cover rules about:

terms of gas supply, including price;

dispute resolution processes between gas market participants;publication of information by gas market participants;

conferral of powers for monitoring and enforcing codes (it is anticipated that this will be done by the Australian Competition and Consumer Commission (ACCC)); and

reporting, record keeping and auditing.

The Government’s consultation paper indicates that the Mandatory Code will:

impose obligations on producers and purchasers to act in good faith;

require pricing offers to be made public by producers;

require producers to disclose information like the factors considered in determining price when issuing expressions of interest or making offers;

set minimum periods for EOIs and offers;

set minimum standards for terms and conditions; and

include a so called ‘reasonable pricing provision’ which will require domestic wholesale gas contracts to be negotiated at ‘reasonable prices’ – defined as the efficient long run marginal costs of domestic supply, allowing for a commercial return on capital reflective of the gas industry’s risk profile.

Such a reasonable pricing provision would be a dramatic upheaval of the regulation of Australia’s East Coast gas market.  

It would introduce the economic regulation of Australian East Coast gas and place each gas contract entered into within the scope of the Mandatory Code under legal scrutiny from the ACCC.

It is proposed that the Mandatory Code will apply to gas from fields that are not yet producing as soon as it comes into effect.

With respect to fields that are already producing the Mandatory Code will come into effect at the conclusion of the Price Order Period.

Gas supply agreements currently under negotiation

It is unclear which regime will cover gas supply agreements entered into after the Price Order comes into effect but before the Mandatory Code comes into effect, with respect to gas supply after the conclusion of the Price Order Period.

Some producers have indicated that they are suspending all gas contracting activities for the time being.

Energy bill relief

The Act also amends the Federal Financial Relations Act 2009 (Cth) to introduce a new type of payment to the states and territories in order to provide $1.5bn of temporary relief on energy bills for eligible households and small businesses.  

Funds will be paid to the states and territories who will administer the payments to be applied to energy bills.

Penalties

Civil penalties for breaches by corporations of the Mandatory Code or the Price Order can be up to the greater of:

AUD$50,000,000;

three times the value of the benefit obtained directly or indirectly attributable to the act; or

30% of the breaching party’s turnover during the breach period.

The Act also grants the ACCC the power to issue infringement notices and public warning notices and grants broad information gathering powers.  

The Act also includes an anti-avoidance scheme.

How we can help

It is highly unusual for economic regulation to be imposed on an entire sector on such short notice.

As a major full service Australian law firm with strong oil and gas transactional and regulatory experience we are well placed to assist you through these uncharted waters, whether as an existing gas producer, gas consumer or potential investor into the Australian East Coast gas market.

We have closely followed the evolution of Australia’s gas market, including recent debate, and we have scrutinised the Act, Price Order, Consultation Paper and proposed Mandatory Code.

We are familiar with economic regulation and we are ideally placed to assist market participants:

assess their current gas supply or procurement positions;

implement new gas supply or purchasing strategies; and

put in place compliant gas supply negotiation, contracting and pricing systems.

Please do not hesitate to contact any member of our team if you would be interested to learn more about this development or require any assistance.