AER’s work in gas reform
By AER Deputy Chair, Jim Cox PSM
Good morning everyone.
I would like to start by acknowledging that I stand here on the unceded lands of the Wurundjeri people of the Kulin Nation, and I pay respects to their Elders past and present and their continuing connection to the land and sea.
Thank you for the opportunity to address the Energy Users Association national conference and provide an update on some of the work the AER is undertaking in reforms related to the gas markets.
The EUAA is a key stakeholder for the AER, providing valuable commercial and industrial consumer perspectives that are influential to our decision-making processes.
And, as you may know, the AER exists to protect all consumers - so we look to you for that insight to help us make decisions that are in the long-term interests of all energy users.
I’ve been on the Board of the AER since 2013. In that time there have been significant reform packages announced for the gas markets.
Key to these reforms was the introduction of short-term gas commodity and pipeline capacity trading markets including the Gas Supply Hub Exchange at Wallumbilla in 2014, and the east-coast-wide Day Ahead pipeline capacity auction, which began operation in 2019.
The expansion of Gas Bulletin Board scope in 2018 and again in 2023 as part of Gas Market Transparency Measures, has made for greater transparency in gas production and pipeline flows to assist gas trading and promote investment.
These reforms have brought forward new roles for the AER in the compliance and enforcement of the trading and accurate reporting of data including around record-keeping for the Day Ahead Auction and applications for exemptions to trading platforms.
Last year new laws were passed on another package of reforms focusing on:
- simplifying the gas pipeline regulatory framework,
- addressing the risk that the previous regulatory regime may have resulted in under-regulation of gas pipelines,
- providing greater support for commercial negotiations by improving transparency of information available to gas transport users, and
- providing a broader dispute resolution framework that supports both mediation and arbitration.
These latest reforms have again given the AER new responsibilities, and this is what I will focus on with you this morning.
I will start with:
- the commencement of pipeline form of regulation reviews, and
- the introduction of a new dispute resolution mechanism.
I will then talk about:
- our enhanced wholesale market monitoring powers that are to be legislated very soon.
And I will finish with:
- what we are doing in compliance and enforcement of the new Gas Market Transparency Measures that came into effect just over a year ago.
Form of regulation reviews
So, first to the AER’s new responsibility of conducting form of regulation reviews.
Gas pipelines are either fully regulated scheme pipelines or lightly regulated non-scheme pipelines and - as a response to concerns that the previous regulatory regime was resulting in under-regulation and not optimising the benefit of gas infrastructure and markets for end users - the AER has been given the ability by Energy Ministers to conduct form of regulation reviews.
The AER is the regulating body for pipelines across all states and territories, except Western Australia.
There are currently 171 scheme and non-scheme pipelines registered with the Australian Energy Market Commission, 58 of which are in WA.
So of the 113 pipelines across the rest of the country that come under our purview, 10 are subject to full price regulation by us. The rest are not.
In March we announced that our first form of regulation review would be of the South West Queensland Pipeline which is owned by the APA Group.
It is currently a non-scheme pipeline and therefore subject to light regulation.
This announcement was met with a response from APA in the media that form of regulation reviews will slow down Australia’s energy transition because they believe it will slow down investment that’s needed to meet forecast gas shortages.
With the South West Queensland pipeline there was an underlying attitude of “don’t fix what isn’t broken”.
But this is a strategic pipeline of critical importance to the east coast gas system in transporting gas between northern and southern states.
Its form of regulation has never been reviewed, so it is only right that we take a closer look to ensure consumers are getting the best economic outcome from this pipeline.
We will look at pricing in its current form and compare various scenarios, including light versus full regulation, to see if there may be market power being exercised at the expense of consumers.
We haven’t formed any definitive views on the extent of market power that may be currently held and exercised… and we remain open-minded on the question of whether the form of regulation applying to the South West Queensland Pipeline should change.
We consider consumer engagement is important and vital for informing our decision making. While the AER is proactively reaching out to various stakeholders to seek views, we also encourage any members who may have any views to share, to get in contact with the AER.
We have got some work to do in how we undertake this first review and meet the expected timetable for a final decision, by November this year.
Dispute Resolution
Now to dispute resolution, as the gas reform package also required the AER to introduce a new dispute resolution mechanism that now includes mediation as an option for small gas shippers to use in pipeline access disputes.
We know that disputes can arise in areas such as the terms of a new contract or pipeline access points.
Mediation over arbitration in any situation is typically less costly and quicker when resolving a dispute.
In November last year we published our final Pipeline Access Dispute Guide following a period of consultation and stakeholder engagement.
As commercial and industrial energy users, the guide will help you understand:
- the new dispute resolution framework and processes under the National Gas Rules and Law, and
- the various pathways and procedures that can be used to resolve disputes, including when a matter can be referred to mediation and how mediation works.
- It also covers arbitration processes which are available to all shippers.
As with arbitration, the AER is administering this new mediation framework.
We’ve appointed a pool of mediators which the disputing parties can select from to steer them through. If they can’t agree on a mediator, the AER will appoint one from the pool.
We’ve welcomed this dispute mechanism reform as a way to ensure that all parties, including smaller transporters of gas, have cost-effective avenues they can go down to reach fair and reasonable agreements.
The Guide and panel information is all available on our website.
Enhanced wholesale market monitoring
Turning to our new powers in wholesale market monitoring which are due to be legislated in a matter of days.
These new rules are set to further bolster the transparency of both the wholesale gas and electricity markets.
A key element of our new powers will be to look at how gas contract markets impact operations of the spot wholesale markets and the implications they have for the final costs consumers face.
We’ve just finished a consultation period on an Issues Paper we released to seek views from across the energy sector on how we apply these new powers to ensure there is clear intention and benefits, without unnecessary regulatory burden.
Why is this important?
To date, we have relied primarily on public information to assess the performance of wholesale markets, which provides very limited visibility of market participants’ contracting behaviour.
Contract-related information is important in assessing the performance of energy markets.
For gas, participants can only sell gas into a wholesale gas market if they have gas at that location, so participating in the market may depend on contracting gas pipeline capacity.
In addition, approximately 80% of trade in the commodity itself occurs through bilateral contracts rather than in transparent facilitated markets.
Without understanding these contract positions, the AER cannot fulsomely determine what may be driving participant behaviour.
The AER’s responsibilities in market performance reporting require us to provide timely and transparent data to market participants, policy makers and consumers – information that will help us all meet the challenges of the Australia’s energy transition.
These enhance wholesale contract market monitoring powers mean the AER will have access to contracts and related information that will provide us with:
- visibility of the underlying drivers influencing how and why market participants behave the way they do,
- whether the outcomes in wholesale markets reflect effective competition in those markets, and
- whether wholesale markets are operating efficiently.
It means increased transparency on pipeline tariffs and contract positions.
And transparency leads to efficient and well-informed decision-making by market participants and policy makers to deliver outcomes in the long-term interests of consumers.
Therefore, we welcome this increase in monitoring powers as it will enhance our performance reporting.
But we have work to do in setting the right foundation for the mandatory information requests, avoiding unnecessary regulatory burden, while making sure the expectations are clear and the rules are followed.
This work is grounded in stakeholder engagement so we will again look to the EUAA to understand the views of commercial and industrial energy users.
Compliance and Enforcement Priorities
This leads me to the final area I wanted to touch on this morning, and that is compliance and enforcement.
What happens in gas and electricity markets, and how participants behave, is bound by rules… and so market surveillance, monitoring compliance, and pursuing enforcement action, when necessary, is a core role and responsibility we undertake on behalf of all energy consumers.
It is the cornerstone to how we build and maintain trust in the system.
Every year we set Compliance and Enforcement priorities that the agency will focus on its resources on.
Since the introduction of the gas day ahead auction in 2019, the AER has focused its gas compliance and enforcement work on ensuring timely and accurate auction reporting and demand forecasting in downstream wholesale gas markets by market participants.
Last year we instituted civil penalty proceedings against Jemena for alleged large-scale breaches of its auction quantity limits obligations.
We also instituted proceedings against Santos for alleged breaches of record keeping obligations relating to the Day Ahead Auction.
These are just two examples of our commitment to ensuring well-functioning gas markets.
More recently, we’ve made it a priority to clarify obligations and monitor compliance with reporting requirements under the Gas Market Transparency Measures that were introduced in March 2023 to address information gaps across the east coast gas industry.
Over the past year, the AER has worked closely with AEMO and industry to make sure all participants are registered for reporting and ensuring industry participants understand and are able to comply with their obligations.
This is a large body of work, with reporting extending across the supply chain, including:
- gas reserves and resources estimates,
- LNG exports and large user demand reporting, and
- short-term domestic and LNG sales information.
We published our first ‘Short Term Transactions Special Report’ in December 2023 which discusses the observations of the first six months operation of these transparency measures as they relate to the gas short-term trading markets.
Why is this important?
High-quality information on these transactions will drive better pricing transparency, improve the efficiency of gas markets, help to facilitate investment decisions, and inform government policy.
Sellers and buyers can use pricing information from these transactions to inform recontracting, while for policy makers and market bodies, the location of volumes could inform the potential for new market trading locations.
We all have a more complete view on how gas is sold, stored, transported and delivered – and that’s better for all consumers.
Our Short Term Transactions Special Report, as well as our other market performance reports, are all publicly available on the AER website.
And the AER will continue to prioritise compliance with wholesale gas obligations into 2025.
Conclusion
So by way of conclusion this morning, I hope I have provided you with a picture of the action that’s being undertaken at the AER to implement the latest package of government reforms in gas markets.
Our pipeline form of regulations reviews will continue for several years.
We will continue to implement and oversee the framework of a more accessible dispute resolution mechanism.
And we will use the improved market transparency and increased information-gathering to enable better decision-making.
Across of all this, we are committed to working with industry to help them understand and meet their compliance obligations.
We do all of this in the long-term interest of consumers.
Thank you.
I am happy to take any questions.