East Coast Gas Market Reform Package

Articles Written by Michele Laidlaw (Partner)

Key takeaways

On 19 August 2016, the COAG Energy Council released a comprehensive Gas Market Reform Package for east coast gas markets. Much of the reform work will be led by a Gas Market Reform Group (GMRG) established by the COAG Energy Council. Dr Michael Vertigan AC has been appointed independent chair of the GMRG. Dr Vertigan will be supported by a Project Management Office responsible for establishing and co-ordinating technical working groups tasked with developing the detailed reforms.

The package adopts many of the recommendations for east coast gas market reform made by the Australian Energy Market Commission (AEMC) and the Australian Competition and Consumer Commission (ACCC) earlier this year. The recommendations were the result of two major studies: the ACCC’s “Inquiry into the east coast gas market” and the AEMC’s East coast wholesale gas markets and pipeline frameworks review.

This note considers in more detail the recommendations adopted by the COAG Energy Council relating to:

  • the coverage test for economic regulation of gas transportation pipelines;
  • facilitated wholesale gas markets and the secondary trading of gas transportation capacity; and
  • access to information.

Coverage test review

The ACCC proposed significant changes to the regulation of primary gas transportation markets, in light of evidence that a large number of existing pipelines had been engaging in pricing above levels expected in a workably competitive market (i.e. monopoly pricing).

The ACCC report argues this monopoly pricing was associated with a range of economic inefficiencies, including higher delivered gas prices for end users and consequently, reduced downstream usage and investment. The ACCC concluded that this behaviour was not being constrained by market forces or regulation (or the threat of regulation) under the National Gas Law. Consequently, it recommended the COAG Energy Council introduce a new test to determine when a pipeline should be subject to regulation (or coverage), namely where a pipeline has ‘substantial market power’ that is likely to continue in the medium term and such regulation will, or is likely to, contribute to the achievement of the National Gas Objective of promoting “efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas”.

This is noteworthy not only on its own account, but because it highlights an on-going policy debate regarding the appropriate role of economic regulation in relation to non-vertically integrated infrastructure, including port, rail and airport assets.

The COAG Energy Council has not made a final decision about replacing the coverage test, no doubt in response to public push-back from industry about the ACCC’s proposals. Instead, it has commissioned the GMRG to undertake more work to examine the current test and consult further with stakeholders. The GMRG is to give its recommendations to the COAG Energy Council before the Council’s meeting in late 2016, when it is expected that Ministers will decide whether to replace the test.

The ACCC also recommended a review of those parts of the National Gas Rules that apply to pipelines already subject to full economic regulation in response to concerns that those pipelines may still be able to exercise market power. The COAG Energy Council has agreed to ask AEMC to undertake the review.

Short term gas and capacity trading

The east coast market is built on a framework of long term gas supply and transportation contracts. Long term contracts can embed some flexibility for the buyer – such as daily nominations and within day adjustments. They can also embed flexibility for the seller – contracted but un-nominated gas can be sold short term or stored, and contracted but un-nominated transportation capacity can be sold as as-available capacity.

Short term trading of gas and secondary trading of transmission capacity deliver flexibility outside the framework of the underlying long term contracts. Access to short term gas and related services gives market participants flexibility to respond to changes in their own requirements and the broader market, which can arise out of events such as unplanned outages, capacity constraints and electricity price spikes.

Historically, in the east coast gas market, barriers to short term and secondary trading have included transaction costs, lack of price transparency and difficulties in locating willing buyers and sellers. In the case of gas transportation capacity, contract terms and gas transporter operational requirements have also inhibited secondary trades.

Since 2014, gas supply hubs (initially at Wallumbilla and now also at Moomba) have facilitated short term trading of gas by reducing transaction costs and bringing buyers and sellers together. Barriers to capacity trading remain, notwithstanding some changes made by gas transporters to facilitate secondary trading on a bilateral basis.

The AEMC proposed a suite of further gas market reforms intended to promote short term trading of gas. This in turn is intended to result in a transparent, liquid gas reference price and the development of financial products to hedge price and physical risks.

The COAG Energy Council largely supported the AEMC’s proposals. The reforms involve:

  • the development of two primary trading hubs – a Northern Hub located around Wallumbilla and a Southern Hub in Victoria – that would operate on a similar basis to the current Wallumbilla/Moomba gas exchange design with the addition of a market-based balancing mechanism, at least at the Southern Hub;
  • for gas transmission capacity, a day-ahead auction of contracted but un-nominated pipeline capacity and a capacity trading platform for secondary trading of pipeline capacity; and
  • standardisation of the terms of gas transportation agreements (in both primary and secondary markets) to support the proposed auction mechanisms and development of a liquid secondary market.

The Northern Hub is already operating. The Southern Hub would replace the current arrangements in Victoria and would require the allocation of firm capacity rights in the Victorian transmission network. The COAG Energy Council gave in-principle support to this reform, which remains the subject of more detailed work as part of a separate AEMC inquiry initiated by the Victorian Government. The AEMC’s final draft report is due in October 2016.

As to the short term trading market (STTM) arrangements currently applicable at the Sydney, Brisbane and Adelaide hubs, the COAG Energy Council gave in-principle support to simplifying these so that they operate only as balancing markets, once the other reforms have been implemented.

The COAG Energy Council agreed to the AEMC’s proposals for standardisation of the terms of gas transportation agreements. The GMRG will lead the next stage of work on this proposal.

Access to information

Both the ACCC and the AEMC recommended changes to improve the information available to the market. The AEMC’s proposals encompassed:

  • mandatory reporting of information about secondary trading of pipeline capacity, including price, type and location of service, contract duration, receipt and delivery points and service characteristics such as direction and maximum capacity; and
  • extensive changes to the Gas Bulletin Board, including a new requirement for gas producers to report proved and probable reserves, extending the scope of the reporting obligations to cover a broader range of market participants and facilities, the provision of information by receipt and delivery point (not zones) and earlier publication of information about actual flows.

The COAG Energy Council supported these proposals. Some are to be pursued immediately through changes to AEMO’s procedures or to the National Gas Rules. Others will require changes to the National Gas Law and regulations.

Next steps

Work to establish the GMRG is to start immediately and it is due to report to the COAG Energy Council on the coverage test before the Energy Council meeting scheduled for late 2016. The indicative timetable for the balance of the package includes design work through to early 2018 and implementation through to 2021.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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