Price caps and mandatory codes of conduct to be imposed on the domestic gas market

On 9 December 2022, the Commonwealth Government released exposure drafts of its proposed Competition and Consumer Amendment (Gas Market) Bill 2022 (Cth) (Exposure Bill) and Competition and Consumer (Gas Market Emergency Price) Order 2022 (Cth) (Proposed Price Cap Order) for public consultation.

The Exposure Bill proposed amending the Competition and Consumer Act 2010 (Cth) (CC Act) to set up an overarching framework for the Commonwealth Government to regulate the Australian domestic gas market via gas market emergency price orders (such as the Proposed Price Cap Order) and mandatory gas market codes.

The explanatory materials for the Exposure Bill noted that one of the aims of the Exposure Bill was to reduce the impact of the global energy shock on Australian businesses caused by Russia’s invasion of Ukraine. As has been widely reported, due to the links between the Australian east-coast domestic gas market and export markets, the heightened global prices for LNG and gas caused by Russia’s invasion of Ukraine, and the subsequent sanctions placed on Russia, are resulting in high wholesale gas prices in the east coast of Australia.

On 15 December 2022, the Treasury Laws Amendment (Energy Price Relief Plan) Bill 2022 (Cth) (Price Relief Bill) was introduced into the Commonwealth Parliament at an extraordinary sitting and was passed by both Houses of Parliament. The Price Relief Bill contains (among other things) amendments to the CC Act to set up the framework mentioned above that had initially been proposed in the Exposure Bill.

Price cap

The Proposed Price Cap Order, which will be able to be made under the new sections of the CC Act that are to be introduced by the Price Relief Bill, proposes a $12/GJ cap in relation to all gas supplies made by gas producers from developed fields during the 12 month cap period via bilateral negotiation or gas supply hubs (Wallumbilla and Moomba).

The proposed price cap will only apply to new agreements or supplies made during the price cap period (or variations made to existing agreements or supplies during the price cap period).

It will not apply to:

• existing arrangements (including master agreements where price is agreed);
• prices after the expiry of the price cap period;
• prices via Short Term Trading Markets or the Declared Wholesale Gas Market; or
• the supply of LNG for export.

Seeking to avoid or not complying with the price cap will be prohibited. Companies and individuals in breach of this law will face significant penalties. There will also be a host of other penalties and remedies including compensation for non-parties who suffer loss.

Mandatory gas market code

The content of the mandatory gas market code to be made under the new sections of the CC Act that are to be introduced by the Price Relief Bill is yet to be determined.

The Price Relief Bill and other materials, however, propose that the mandatory gas market code:

• be “two-way” with obligations on all gas producers and gas customers;
• cover all forms of conduct between all gas market participants;
• regulate obligations in relation to negotiations, expressions of interest, offers, counter-offers, bids and gas sale agreements;
• have reasonable pricing provisions;
• have binding arbitration and other dispute resolution requirements;
• regulate the operation of any gas exchange platform;
• provide for increased transparency in market conduct; and
• provide the ACCC with powers to obtain information from parties.

The reasonable pricing provisions relate to undeveloped fields and propose to take into account operating expenditure, depreciation, return on capital and taxes and royalties in determining whether pricing is reasonable. If pricing is below $12/GJ during the price cap period, it is deemed to be reasonable.

Johnson Winter Slattery has been advising APPEA and its members on the Exposure Bill, the Proposed Price Cap Order and the proposed mandatory gas market code.