The Council’s vision is for the establishment of a liquid wholesale gas market that provides market signals for investment and supply, where responses to those signals are facilitated by a supportive investment and regulatory environment, where trade is focused at a point that best serves the needs of participants, where an efficient reference price is established, and producers, consumers and trading markets are connected to infrastructure that enables participants the opportunity to readily trade between locations and arbitrage trading opportunities.” COAG Energy Council 2014, Gas Market Vision1

Are east coast gas markets fit for purpose? Are they competitive? To answer these questions, two separate reviews are being undertaken. The East Coast Wholesale Gas Market and Pipeline Frameworks Review is being conducted by the Australian Energy Market Commission (AEMC) and will assess the need for change. The ACCC’s East Coast Gas Inquiry will investigate the current state of competition. Both are intended as steps towards achieving the Gas Market Vision articulated in late 2014 by the COAG Energy Council.

Why now?

LNG exports from Queensland are a significant new source of demand and will change the pattern of gas consumption on the east coast of Australia. Markets have been adjusting in anticipation; new infrastructure allows for physical flows between markets and new trading tools have been developed, including the Wallumbilla gas supply hub and capacity listing platforms.

In the face of these developments, market participants question whether supply and delivery arrangements meet the future needs of the market.2 Buyers question why they can’t get gas at the price or on the terms they need. They have argued that major gas producers are manoeuvring to “hoard gas and escalate margins using their market power and disproportionate influence”.3

The need for a more strategic approach to gas market reform has been a consistent theme of gas market reviews in recent years.4 The AEMC review was initiated by the COAG Energy Council and is intended to meet that need. The AEMC will consider the design, function and roles of facilitated gas markets and gas transportation arrangements.5 The AEMC has also been asked by the Victorian Government (through COAG) to review the Victorian wholesale gas market arrangements. The first stage of the review combines the two requests in one process.

As to gas market competition, complaints focus on activity that takes place under bilateral gas supply and transportation arrangements and so is largely outside the regulated gas markets. Following several years of continuing public commentary about the issue and no conclusive evidence, the Commonwealth’s 2015 Energy White Paper committed to a competition review.6 In April 2015 the Federal Minister for Small Business directed the ACCC to hold an inquiry into “the competitiveness of wholesale gas prices and the structure of the upstream, processing, transportation, storage and marketing segments of the gas industry”.7

Why two reviews?

The AEMC’s review is conducted under the National Gas Law. While the AEMC is free to conduct the review in any manner it considers appropriate, but cannot require information to be provided. On the whole this seems unlikely to limit the review, since its focus is on facilitated (regulated) markets and information services for which the AEMC already has a key governance role.8 These markets and services operate under transparent rules and procedures, and data about market outcomes is readily available. The exception may be the AEMC’s review of pipeline capacity trading, where the AEMC will largely be relying on market participants to provide information about contract terms and barriers to trade.

The facilitated markets provide a very incomplete complete picture of gas trading in the east coast gas market, since most gas is traded and transported under bilateral contracts. It is this trading activity that is the focus of concerns about competition. The ACCC’s review is being conducted under Part VIIA of the Competition and Consumer Act 2010 (Cth) which gives the ACCC broad powers to collect information about contracts and the negotiation process, including by summoning a person to appear at an inquiry to give evidence and produce documents. Confidentiality obligations cannot be relied upon as a ground for refusing to provide information.

In short, the AEMC has limited power to gain access to commercially confidential information but a broad remit to recommend change consistent with the national gas objective.9 The ACCC by contrast can look into areas of the market beyond the AEMC’s reach. Inevitably there is overlap between the reviews, particularly in relation to pipeline capacity trading. The ACCC’s findings may be valuable in informing the AEMC’s recommendations and COAG’s response.

Timing

The AEMC review is to be conducted over two stages. Stage 1 is an analysis of the gap between the current market arrangements and what is required to support COAG’s vision. It is expected to result in recommendations for immediate, “no regrets” changes. Stage 2 will deal with medium to long term market development.

The AEMC published its draft Stage 1 report in May 2015 and the final report is due in June 2015.10 The draft Stage 2 report is due in late 2015 or early 2016 but will not be finalised until after the COAG Energy Council has responded to it.11

The ACCC’s report is required to be submitted to the Minister by early April 2016. In June 2015, the ACCC issued the “East Coast Gas Inquiry Issues Paper” with responses due by 2 July 2015. Public hearings will be held and based on past practice, may be expected around September this year. The procedure to be followed at any hearing is within the discretion of the inquiry Chair and the ACCC is not bound by the rules of evidence.

Emerging issues

The AEMC’s draft Stage 1 Report acknowledges the case for change but is cautious about imposing costs that are not justified by the likely benefits. Over the shorter term, it is proposing steps to improve access to information, start work on the STTM redesign and harmonise gas day start times across markets. Over the longer term, the draft report contemplates redesign of the STTM and the DWGM and potential measures to facilitate pipeline capacity trading

As of June 2015, the ACCC’s inquiry is at a preliminary stage. The Issues Paper indicates that the ACCC’s key focus will be on:

  • obtaining a comprehensive understanding of the structure of the gas industry for the purpose of making factual findings and recommendations; and
  • assessing the state of competition in the wholesale supply of gas, to determine whether there are any features of the gas industry that limit competition or whether there has been specific behaviour that restricts competitive access or involves the exercise of market power.

In relation to the second of these objectives, the Issues Paper echoes comments from the Productivity Commission’s 2015 report to the effect that difficulties in securing gas may be explained by inadequate competition or may be a rational response by suppliers to market conditions.12 The Productivity Commission cautioned:

Proposals to address perceived problems with market power should not be introduced unless sufficient evidence has been gathered to demonstrate the existence and exercise of enduring market power, and that the introduction of such proposals would maximise net benefits for the community as a whole.”13