ACCC Gas Inquiry April 2018 Interim Report

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ACCC gas inquiry

By Anne Wardell, Compliance Quarter. 

The Australian Competition and Consumer Commission (ACCC) has released its third interim report in relation to gas supply arrangements in Australia; Gas Inquiry April 2018 Interim Report (the report).

The report covers three topics:

  • an update on gas prices, which confirms the recent fall in gas commodity price offers for 2018 and 2019 and that prices struck under gas supply agreements (GSAs) remain generally higher in the Southern States than in Queensland;
  • the ACCC decision to publish on its website an LNG netback price series to improve gas price transparency and assist commercial and industrial (C&I) users in negotiating for gas supply; and
  • the ACCC assessment of new reporting in relation to transportation services for non-scheme pipelines, which questions whether early information on standing offers and standing price methodologies is adequately addressing the objective of reducing information asymmetry between pipeline operators and users of pipeline services.

The first two interim reports released by the ACCC indicated that there are major problems with the workings of the gas market on the east coast[1].  The third report continues to consider the problems encountered in this market.

The report defines the east coast market as including ‘Queensland, South Australia, New South Wales, the Australian Capital Territory, Victoria and Tasmania’. It is worth noting that the Northern Territory will be connected to the East Coast Gas Market from 2019 and will thereafter be part of the consideration.

The report provides the following key points to consider in relation to the domestic gas price outlook:

  • The average gas commodity prices paid by all gas buyers in the East Coast Gas Market in 2017 under gas supply agreements (GSAs) have gradually increased over the course of 2017 as GSAs with historically low prices continue to roll off. Under more recent GSAs entered into since January 2016, in the last quarter of 2017:
    • gas buyers paid, on average, $8.62/GJ to producers in Queensland
    • C&I users paid, on average, $9.00/GJ to gas retailers across the East Coast Gas Market.
  • After peaking at over $20/GJ in early 2017, gas commodity prices offered by suppliers for gas supply in 2018 and/or 2019 have continued to trend downward over the course of 2017. By the end of 2017, most offers for gas supply in 2018 and/or 2019 were priced around $8–10/GJ for gas commodity.
  • The range of prices offered for gas supply more recently is narrower than the range of prices offered in the earlier part of 2017.
  • This could reflect a less uncertain gas supply-demand outlook for 2018 and 2019 following the commitment made by the LNG producers under the Heads of Agreement with the Australian Government to make additional quantities of gas available into the domestic market. ACCC monitoring and close attention to specific deals may also have had an effect. The ACCC’s monitoring and public reporting can inhibit some of the exercise of market power in gas price negotiations.
  • The average prices under GSAs struck at the end of 2017 for gas supply in 2018 and 2019 are similar to the average prices under the GSAs struck earlier in the year across the east coast. GSA prices vary between Queensland and the Southern States: o In Queensland, the average producer prices are $8.54/GJ for supply in 2018 and $8.41/GJ for supply in 2019. o In the Southern States, the average producer and retailer/aggregator prices for gas supply in 2018 are in the $8–10/GJ range, while the average prices for gas supply in 2019 are generally around $9/GJ.
  • Simple average gas prices in the domestic short-term trading markets are lower than they were at the same time last year. Comparing the period from 1 January to 28 March for both 2017 and 2018 shows that the simple average prices are about:
    • 7 per cent lower in 2018 in the Sydney STTM, Adelaide STTM and the Victorian Declared Wholesale Gas Market (DWGM) – $9.01/GJ this year compared to $9.65/GJ last year o 22 per cent lower in 2018 at the Wallumbilla Gas Supply Hub (GSH) – $7.95/GJ this year compared to $10.23/GJ last year
    • 26 per cent lower at the Brisbane STTM – $7.55/GJ this year compared to $10.15/GJ last year (footnotes omitted).[2]

The report provides the following key points to consider in relation to the LNG netback price series:

  • The ACCC has decided to publish an LNG netback price series on its website on a trial basis for the duration of this inquiry. At the conclusion of the inquiry, the ACCC will assess the merits of the publication and will make a recommendation on whether it should continue.
  • The publication will commence in the coming months and will include LNG netback prices based on measures of recent and historic Asian LNG spot prices. It will also include a forward LNG netback price indicator extending to the end of the following calendar year. The ACCC will also publish accompanying documentation that will explain the concept of LNG netback pricing, the formula used to derive LNG netback prices and provide guidance on its interpretation.
  • The publication of this series by the ACCC does not represent the ACCC setting a level of domestic gas prices nor the ACCC’s forecast of domestic gas prices. The primary purpose of the publication is to improve transparency.
  • Availability of an indicative price and information about the factors that are driving domestic gas prices would greatly assist C&I users in negotiations for gas supply. Absence of this information inhibits competitive bargaining and makes it more difficult for C&I users to make informed long-term investment decisions.
  • The publication of the LNG netback price series is an important step towards improving transparency of pricing as LNG netback prices currently play an important role in influencing domestic gas prices in the East Coast Gas Market. However, the LNG netback price is not sufficient on its own – there is potentially a range of factors that can influence prices offered to domestic gas buyers.
  • The final price a particular domestic C&I user may need to pay to acquire gas could also vary considerably from the LNG netback price due to a range of factors specific to the C&I user’s individual circumstances. This includes the cost of transporting gas to the user’s location and non-price terms they request in their gas supply agreement (GSA).
  • The ACCC is currently exploring the key factors that may influence domestic gas prices in the East Coast Gas Market. The ACCC will discuss its findings in future interim reports and will consider whether to include this information alongside the LNG netback price publication on its website[3].

The report provides the following key points to consider in relation to transport issues:

  • Under the terms of reference for this inquiry the ACCC has continued to monitor the publicly available pipeline information to assess whether it addresses the information asymmetries identified in the ACCC’s 2015 inquiry into the east coast gas market. For this interim report, we have reviewed the information recently published by operators of non-scheme pipeline operators under Part 23 of the National Gas Rules.
  • This has revealed that on the key pipelines used to transport gas from Queensland to the Southern States, the standing prices offered by pipeline operators for firm forward haul services are generally higher than the prices that shippers are currently paying for these services or will pay under recently negotiated contracts. This suggests that standing prices are viewed as a price ceiling by pipeline operators and that shippers should be able to negotiate a better deal bilaterally. Together with the limited pricing methodologies published by pipeline operators, we are concerned that the information published may not be achieving the intended objective of reducing the information asymmetries faced by shippers in negotiations.
  • While additional information is due to be published by operators of non-scheme pipelines later this year that should further reduce the information asymmetries faced by shippers, we have identified some potential improvements that could be made to the published pricing methodologies . These improvements would allow shippers to better understand how standing prices have been calculated and to negotiate more effectively with pipeline operators.
  • We will continue to review the information published under the new disclosure obligations, including the financial and weighted average pricing information as it is published from October this year. We will provide updates in future reports.
  • The ACCC has examined new 36-month uncontracted capacity information published by operators of non-scheme pipelines. This confirms that some of the key pipelines used in the transportation of gas from Queensland to the Southern States are contractually congested. However, discussions with pipeline operator, APA Group, indicate that there may be more uncontracted capacity on the South West Queensland Pipeline than publicly available information suggests, which the ACCC continues to examine with APA[4].

[1] Speech delivered by Ms Nicole Ross, Gas Inquiry Unit, ACCC on 28 February 2018 at 6th Annual Australian Domestic Gas Outlook Conference.

[2] Gas Inquiry April 2018 Interim Report at p 15.

[3] Ibid at p 31.

[4] Ibid at p 46.

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