Government intervention in the gas market: east coast gas producers facing permanent price controls and other requirements

One of the measures announced by the Federal Government late last year to achieve reasonable prices for domestic gas was the introduction of a mandatory code of conduct which gas producers would need to follow when negotiating and entering into gas supply agreements.

On 26 April 2023 the Federal Government released for public comment an exposure draft of the compulsory legislative code to be made as a regulation under the Competition and Consumer Act 2010 - Competition and Consumer (Gas Market Code) Regulations 2023 (the Code).

Comments and submissions on the Code may be made to the Department of Climate Change and Energy by 12 May 2023.

It is expected that the Code will be finalised and enacted in force from June 2023.

Overview

The Code specifies mandatory requirements to be complied with by a person in the business of producing gas in any State or Territory other than Western Australia (gas producer) when offering to supply gas and negotiating and entering into gas supply agreements.

It has requirements in respect of the producer issuing expressions of interests (EOIs) to supply gas, as well as in the mandatory steps to be taken in negotiating a gas supply agreement with respect to initial and final offers.

The Code also prescribes a price at which gas can be sold under such negotiated contracts and provides for a good faith obligation upon both the buyer and the seller in conducting negotiations and in operating and enforcing rights under a gas supply agreement.

There are also record keeping requirements placed upon the gas producer concerning seeking EOIs to buy gas, initial and final offers made, and gas supply agreements which it enters into. This information is to be provided to the Australian Competition and Consumer Commission (ACCC) on a six monthly basis concerning gas it has available for supply and its intentions in regard to offering that gas for sale.

Application

The Government has indicated that the Code will not be retrospective in effect . Accordingly, it will apply to negotiations for gas supply on a wholesale basis commenced after the Code takes effect and will apply to gas supply agreements made on or after the commencement of the Code.

The Code, to the extent of the reasonable price and good faith obligations, will also apply to gas supply agreements made before the Code commences where those agreements are subject to a variation after the Code commences and the variation includes a provision that determines the price of gas to be supplied under the agreement.

The Code will apply to wholesale supply negotiations and contracts and is not intended to apply to retail sales of gas.

Negotiation steps and procedures

As currently drafted, the Code would not appear to apply to negotiations where the buyer initiates negotiations or discussions for gas supply but only where the gas producer is seeking buyers.

However, it will be an offence for a supplier to enter into an agreement to supply gas if it did not issue a gas final offer in relation to the agreement before entering into it. It is not clear whether this provision would apply where there has been a buyer initiated negotiation and no formal EOI or offer procedure. On its current wording, the requirement would apply in that case.

The Code imposes requirements for producer-initiated EOI processes.

The Code prescribes the contents of an EOI, an initial offer and a final offer, how long those offers must remain open and the circumstances in which they can be withdrawn or terminated.

Content of a gas supply agreement 

The Code also specifies what a gas supply agreement must contain at minimum, being the following:

• annual quantity of gas to be supplied;
  
  
• the degree of flexibility in determining that quantity including take or pay conditions and conditions relating to load factors;
  
  
• the period over which the gas is to be supplied: commencement and end dates;
  
  
• the delivery points;
  
  
• the price or price structure including the effect of any intended take or pay provisions and any price escalation mechanisms;
  
  
• if transportation services or storage services are to be supplied, the price or price structure for those services;
  
  
• the payment terms;
  
  
• the circumstances in which the supplier or buyer may vary the terms of the agreement;
  
  
• a protocol for the supplier and buyer to notify each other within a reasonable time of any major interruptions to either the supplier’s ability to supply gas or the buyer’s ability to accept gas;
  
  
• the consequences, if any, of the quantity of the gas to be supplied not being delivered or not being accepted;
  
  
• the circumstances in which the supplier or buyer may terminate the agreement;
  
  
• the consequences of a breach of the agreement; and
  
  
• procedures for resolving disputes.

Price requirement

It will be an offence for any supplier to (a) enter into an agreement to supply gas if the price payable for that gas could exceed a reasonable price; and (b) supply gas under a gas supply agreement, entered into after the Code commences, if the price payable for that gas exceeds a reasonable price.

It will be an offence for a supplier to make an offer to supply gas on a gas trading exchange where the price under that offer exceeds a reasonable price.

A reasonable price is defined as $12 per gigajoule or if the ACCC makes a determination specifying a reasonable price for regulated gas, the price specified in that determination.

The ACCC, before making a determination, must consult with the public about the reasons why it considers a price to be a reasonable price.

Further, where the ACCC makes a determination of a reasonable price for gas, it cannot make a subsequent determination within two years of the first unless it considers that there has been a substantial change in market conditions for regulated gas or the Climate Change and Energy Minister notifies the ACCC in writing that it may do so.

There is an exemption from the price cap to a supplier (small producer) which produces less than 100 petajoules (PJ) in the most recent financial year ended on or before the commencement of the Code. The exemption also applies where a small producer starts to produce gas only after commencement of the Code, during the first financial year  that started on or after the time it first produces gas, and provided it has not entered into an agreement to supply gas with a person who intended to export that gas from Australia.

A small producer will lose the automatic exemption if it produces more than 100 PJ of gas in a financial year.

Otherwise, a conditional exemption from the price requirement can be sought by application to the Climate Change and Energy Minister and the Resources Minister. They will only grant such an exemption, which will be subject to conditions, if they consider it appropriate to do so.

In considering whether it is appropriate to grant conditional exemption from the price cap, they may take into account any of the following matters:

• the extent to which the exemption would promote (i) a workably competitive market for gas on the east coast of Australia; (ii) the affordability and availability of gas in the east coast market; (iii) the sufficiency or adequacy of investment in, and the production of gas to meet demand in the east coast;
  
  
• the effect or expected effect of other related decisions or government policies;
  
  
• the impact on trade and exports of granting an exemption; and
  
  
•  any other matter the Minister considers relevant.

An exemption, if granted, may be revoked at any time if the Minister considers it appropriate to do so having regard to those abovementioned matters.

The consultation paper on the Code issued by the Government states that large producers (those who produce at least 100 PJ of gas in the preceding financial year) and small producers who sell some of their supply for export will be eligible to apply for an exemption from the price requirement if they negotiate a satisfactory enforceable domestic supply commitment.  

Good faith

Both the producer and the buyer will be subject to an obligation to act in good faith in respect of negotiating a gas supply agreement and in respect of dealings in relation to the concluded agreement, including exercising rights or performing obligations, dealing with or resolving complaints and disputes and varying or terminating the agreement.

Good faith is not defined in the Code, but rather has its general meaning at common law.

The Code indicates that in determining whether a person is acting in good faith the following matters are to be taken into account:

1. the extent to which the person has acted honestly;
   
   
2. whether the person is co-operating to achieve the purposes of the agreement;
   
   
3. the extent to which the person has not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives;
   
   
4. the extent to which the person has acted in a way that constitutes retribution against the other party for past disputes;
   
   
5. the nature of the person’s relationship with the other party, including the extent to which it has been conducted without duress;
   
   
6. the extent to which the person’s relationship with the other party has been conducted in recognition of the need for certainty regarding the risks and costs of supplying or acquiring the gas;
   
   
7. the extent to which the person has undermined, or denied the other party, a benefit of the agreement; and
   
   
8. any other relevant matter.  

However, a party may act in its legitimate commercial interests and not be in breach of the good faith requirement.

Record keeping requirements

A producer must make records in writing and retain them for six years in respect of the following:

1. each EOI issued that proceeded to a supply agreement;
   
   
2. each EOI issued that did not proceed to an agreement;
   
   
3. each initial offer to supply issued that proceeded to an agreement;
   
   
4. each initial offer issued that did not proceed to an agreement;
   
   
5. each final offer issued which proceeded to a supply agreement;
   
   
6. each final offer issued that did not proceed to an agreement;
   
   
7. all documents and information exchanged between the producer and a third party with whom it negotiated an EOI or initial of final offer, including each version of the offer, and where the EOI, or offer did not lead to an agreement, documents and information containing reasons as to why no agreement was reached;
   
   
8. any other documents or information the producer creates, obtains or holds relating to the supply, price or marketing of gas;
   
   
9. each gas supply agreement;
   
   
10. the name of each person that gave the producer a notice in writing in each calendar year, stating an interest in further negotiations in relation to an EOI;
    
    
11. the number of EOIs, initial and final offers issued and the number of gas supply agreements entered into in each calendar year; and
    
    
12. the name of each person to whom the producer issued an EOI, initial or final offer or with whom an agreement was reached in each calendar year.

A producer must, as soon as practicable after each 1 January and 1 July (on and from 1 January 2024), maintain on its website a statement in relation to the 12 month period starting from each 1 January and 1 July which legibly, prominently and unambiguously sets out (Published Information):

1. details of each EOI the producer intends to issue in that 12  month period including the proposed volume of gas and period over which the gas is to be supplied;
   
   
2. the volume of uncontracted gas that is likely to be available in that 12 month period;
   
   
3. the volume of that uncontracted gas that the producer intends to be the subject of an EOI, initial or final offer in that 12 month period or that will be supplied under a gas supply agreement the producer intends to enter into in that 12 month period; and
   
   
4. the gas fields, tenements, or storage facilities from which the uncontracted gas will be recovered, if known by the producer.

A producer must give to the ACCC as soon as practicable after each 1 January and 1 July (on and from 1 January 2024) a notice in writing setting out the following information in relation to each 12 month period starting on 1 January and 1 July:

1. the Published Information; and
   
   
2. whether the producer intends in that 12 month period to do either of both of (i) issue an EOI, initial or final offer for uncontracted gas; or (ii) supply uncontracted gas.

 A producer must notify ACCC as soon as practicable each time:

1. it issues an EOI to supply gas giving the date of the EOI;
   
   
2. it issues an initial or final offer giving the date of the offer and the price or price structure of the offer; and
   
   
3. it enters into a gas supply agreement, outlining the date of the agreement and the price or price structure applying to the supply.

A small producer must notify the ACCC that it is a small producer setting out information that confirms it produces less than 100 PJ per financial year. It is proposed that the ACCC will maintain a register of small producers.

A small producer must notify ACCC as soon as practicable after it forms the intention to enter or enters into an agreement to supply gas to a buyer that intends to export the gas from Australia.

A producer that has obtained a conditional exemption from the reasonable price requirement must provide to the ACCC every three months information confirming it has complied with the conditions to the exemption.

Exemptions

There are limited automatic exemptions from the Code. The good faith obligation and the record keeping requirements apply in all cases except in the case of sales to parties which intend to export the gas in a liquid state.  

The EOI, offer and agreement content requirements do not apply to short term sales (supply for less than 12 months).

As discussed above, a conditional exemption from the price requirement can be sought and small producers will not be subject to the price requirement.

Summary

The draft Code, if enacted, will have very significant impacts on east coast gas producers and their businesses. This is the last opportunity for impacted producers to influence the obligations which will be imposed by the Federal Government under the Code. Submissions can be made until 12 May 2023.