Key takeouts

• The Federal Government’s Mandatory Code of Conduct for the east coast gas market commenced on 11 July 2023 and will apply from 11 September 2023.   
• The Gas Code applies to all wholesale gas producers and their affiliates in the east coast gas market (including the Northern Territory) who issue an EOI, initial or final offer, or enter into an agreement for the supply of natural gas from 11 September 2023.  
• The Gas Code does not apply to transactions in the Declared Wholesale Gas Market in Victoria or the short-term trading markets in Brisbane, Sydney and Adelaide.  The Gas Code also does not apply to the sale of gas by retailers.
• The gas price cap of $12 / GJ, which was originally set by the Federal Government as a temporary measure in December 2022, continues until at least July 2025 under the Gas Code.
• The ACCC is empowered to review and determine the price cap every two years, or earlier within that period if there are substantial changes in market conditions or if authorised to do so by the Energy Minister and Resources Minister.
• Good faith obligations (similar to those in the existing voluntary code of conduct, although broader) apply to domestic suppliers and buyers of gas in the east coast market in relation to gas supply negotiations and agreements.  These good faith obligations subsist for the life of any gas supply agreement and apply to the exercise of rights and obligations under the agreement (including variation and termination) and the resolution of disputes arising under or relating to the agreement. 
• The Gas Code contains extensive mandatory conduct obligations on suppliers relating to the issuing of EOIs, initial and final offers and the negotiation of gas supply agreements.  This includes strict timing requirements and prescribed terms that must be included in any EOI, offer or agreement issued or entered into following the commencement of the Gas Code.  These mandatory conduct requirements largely reflect those in the existing voluntary code of conduct.
• The Gas Code sets out a detailed exemptions framework, which is aimed at incentivising supply into the domestic market on reasonable terms.  The exemptions framework includes:
  • deemed exemptions, which apply automatically provided a supplier satisfies the criteria set out in the Gas Code (e.g., small suppliers are exempt from the pricing provisions of the Gas Code where they supply less than 100 PJ annually and all this is supplied into the domestic market); and
  • conditional exemptions from the pricing provisions of the Gas Code, which are available upon application to the Energy Minister to any supplier not covered under a deemed exemption.  Suppliers wishing to obtain a conditional exemption must justify their exemption and are expected to offer binding domestic supply commitments that could relate to, by way of example, volume, price or conditions on how gas is offered to the market.  Conditional exemptions can only be granted if the Energy Minister and Resources Minister are both satisfied that is appropriate having regard to certain criteria that are largely directed at the promotion of competition and the affordability and availability of gas on reasonable terms.
• Significant penalties apply for failure to adhere to the Gas Code, with maximum penalties for corporations mirroring those under the CCA and Australian Consumer Law (i.e., $50 million, three times the value of the benefit obtained, or 30% of adjusted annual turnover during the relevant breach period).
• Enforcing compliance with the Gas Code has been identified as a key priority for the ACCC, with Chair Gina Cass-Gottlieb flagging earlier in the year that monitoring and enforcing compliance with the Gas Code and temporary price cap will form a “substantial share” of the ACCC’s compliance and enforcement efforts in the energy sector over the next year. 
• Industry participants should familiarise themselves with the various provisions of the Gas Code and its application, and consider what processes are required to ensure compliance.  Gas customers, particularly large users, should familiarise themselves with the requirements to ensure that their suppliers are complying with them.
• Domestic gas producers should also use the time before the commencement of the Gas Code to familiarise themselves with the exemptions framework, including seeking advice, if necessary, to see if any deemed exemptions or conditional exemptions may apply.

Introduction

On 11 July 2023, the Federal Government’s Mandatory Code of Conduct for the east coast gas market came into effect (Gas Code). 

The introduction of the Gas Code shows the Federal Government’s continued willingness to intervene in the domestic gas market in Australia, in particular in light of potential forecast shortfalls in supply.  The introduction of the Gas Code is one of a suite of reforms announced in December 2022 as part of the Federal Government’s Energy Price Relief Plan. 

The Energy Price Relief Plan involved a number of key changes to gas market regulation at the end of last year.  This included amending the Competition and Consumer Act 2010 (Cth) (CCA) to insert a new Part IVBB and the introduction of a twelve month temporary price cap of $12 per gigajoule (GJ) principally on gas sold by east coast gas producers and their affiliates to wholesale customers in Australia.

Six months after these reforms were introduced, the Competition and Consumer (Gas Market Code) Regulations 2023 were passed and the Gas Code commenced.  In this article we analyse the Federal Government’s recent intervention in the east coast gas market and the impact of this intervention on industry participants.  We also examine the key elements of the Gas Code and the expanded role for the ACCC in regulating wholesale gas market conduct.

High energy prices and predicted shortfalls in supply provided a backdrop for Federal Government intervention in the east coast gas market

The east coast gas market experienced unprecedented price volatility and predicted shortfalls in supply in 2022.  This largely stemmed from high international energy prices, including gas and LNG, as well as broader supply chain issues, geopolitical instability, inflation, and uncertain domestic demand for gas-powered generation.

Gas prices on the east coast soared, with reports by the Australian Energy Market Operator that wholesale east coast gas prices had increased by over 140% since the previous year.  In its August 2022 Interim Gas Inquiry Report, the ACCC forecast a shortfall of 56 PJ in the east coast gas market in 2023, the largest shortfall predicted since its current Gas Inquiry commenced in 2017, and indicated that higher gas prices would likely persist.

Against this backdrop, on 9 December 2022, the Federal Government announced its Energy Price Relief Plan which included the immediate commencement of a temporary price cap of $12 / GJ and the planned introduction of an ongoing mandatory gas code of conduct in early 2023.  The purpose of the Energy Price Relief Plan is “to shield Australian families and businesses from the worst impacts of predicted energy price spikes”.

After initial consultations, the Federal Government released the exposure draft of the Gas Code and accompanying explanatory materials in April 2023.  Consultation on the draft Code concluded in mid-May 2023.  On 11 July 2023 the Competition and Consumer (Gas Market Code) Regulations 2023 commenced, establishing the Gas Code as a permanent feature of Australia’s east coast gas market.

Mandatory Gas Market Code of Conduct

Who does the Gas Code apply to?

The Gas Code applies to all wholesale gas producers (and their affiliates) in the east coast gas market (including the Northern Territory) who:

• issue an EOI;
• issue an initial or final offer; and/or
• enter into an agreement,

for the supply of natural gas (not LNG) after the expiry of the two month transition period on 11 September 2023.  

Affiliates of gas producers include related bodies corporate within the meaning of the CCA and the Corporations Act 2001 (Cth) and joint venture participants.

The Gas Code only applies to ‘regulated gas’, which is natural gas that remains in a gaseous state, is suitable for consumption, and is not LNG, or re-gasified natural gas that was imported as LNG.

The Gas Code does not apply to existing gas supply agreements or negotiations that commenced prior to 11 September 2023.  However, the Gas Code’s price cap and good faith obligations will apply to any variation of an existing gas supply agreement where the price under the agreement (or a provision of the agreement relating to price), is varied while the Gas Code is in place, to the extent of the variation.

The Gas Code does not apply to transactions in the Declared Wholesale Gas Market in Victoria or the short-term trading markets in Brisbane, Sydney and Adelaide.  The Gas Code also does not apply to the sale of gas by retailers.

Ongoing mandatory price cap for the supply of gas

(a) Price for gas must not exceed a reasonable price (initially $12 / GJ)

Under the Gas Code, a supplier contravenes a civil penalty provision if they enter into a gas supply agreement where the price payable for gas under the agreement exceeds, or could exceed, a ‘reasonable price’.  The Gas Code currently defines a reasonable price as $12 / GJ.  This reasonable price does not include the price for the provision of transport or storage services (i.e. the cost of gas including transportation may exceed $12 / GJ).   

As described above, a supplier contravenes the Gas Code’s pricing provisions where the price payable for gas exceeds, or could exceed, a reasonable price of $12 / GJ.  Importantly, this means that the ‘reasonable price’ requirement does not only apply where a fixed price is stipulated in agreement, but also where prices may vary. 

It is common for gas supply agreements to determine the price payable by reference to other variables.  Additionally, it is also common for other provisions in a gas supply agreement to have a potential bearing on price (e.g., provisions providing for flexibility or take or pay).  The Gas Code itself does not provide guidance on how these matters will be assessed, however in understanding how the ACCC may approach enforcing compliance with the Gas Code, it is helpful to look at what the ACCC has said publicly so far in its Compliance and Enforcement Guidelines on Part IVBB and Competition and Consumer (Gas Market Energy Price) Order 2022 (Price Cap Guidelines), which were published in June 2023.

While they do not yet cover the ACCC’s approach to enforcing the Gas Code, the Price Cap Guidelines do set out how the ACCC intends to enforce compliance with the temporary gas price cap (which includes analogous provisions relating to price). 

Key takeaways from the Price Cap Guidelines include that:

• an agreement may be in contravention of the price cap if the price of gas to be delivered is tied to another commodity and there is no provision to default to the price cap if the price rises above $12/GJ.  The ACCC considers that the inclusion of a provision in the agreement that operates to prevent the price exceeding the price cap is likely to address the risk of contravention;
• in relation to agreements that include take or pay provisions, the ACCC will assess compliance with the price cap by reference to the price payable for the contracted quantities over the relevant period and not the resulting price that would become payable if the customer elected not to take all the quantities under the agreement; and
• in respect of supply flexibility provisions that bear on price, these provisions are included in the ACCC’s assessment of the relevant price payable for gas under an agreement.  The ACCC provides the example of gas subject to a load factor and states that the component of the total price payable which is attributable to that load factor must be included in the $12 / GJ to avoid contravention.

The ACCC is reportedly planning to publish further guidance material on how it will monitor and enforce the Gas Code.  

(b) Expanded role for the ACCC to review and set the ongoing price cap

The ACCC is tasked with the power to review and set the price cap every two years.

The Gas Code provides that the ACCC may issue, via legislative instrument, price determinations that set the ‘reasonable price’ of gas for the purpose of the Gas Code.  This is similar to the power conferred on the Australian Energy Regulator under the Competition and Consumer (Industry Code--Electricity Retail) Regulations 2019 in respect of setting default market offer prices.

The ACCC may review and update the price cap every two years (meaning the current cap is in place until 2025), or earlier within that period if there are substantial changes in market conditions or if authorised to do so by the Energy Minister and Resources Minister.

In undertaking a review of the price cap and making a price determination, the ACCC must consult with the public and take into account any comments arising from its consultation.  The ACCC may also take into account any of the following matters:

• the extent to which the determination would promote a workably competitive market, the affordability and availability of gas, and the sufficiency or adequacy of investment in, and production of, gas to meet demand, in the east coast gas market.
• the effect or expected effect of other related decisions or government policies; and
• any other matter the ACCC considers relevant.

Mandatory conduct obligations

(a) Good faith

The Gas Code introduces a good faith obligation on parties engaging in negotiations and entering into agreements for the supply of gas.  This obligation is similar to that in the existing voluntary code of conduct, although the obligation is broader under the Gas Code as it applies to all parties (not just the supplier) in relation to negotiations.

This obligation is contravened if a party fails to deal in good faith, within the meaning of the unwritten law, with the other party in relation to the negotiations or the agreement.  The obligations extends to post-agreement conduct and applies to dealings in relation the exercise of rights or performance of obligations under an agreement, dispute resolution procedures or varying or terminating an agreement.

The Code sets out a list of matters a court may have regard to when considering if a party has failed to deal in good faith, which include:

• the extent to which the person has acted honestly;
• the extent to which the person has not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives;
• the extent to which the person has acted in a way that constitutes retribution against the other party for past disputes with the other party;
• the nature of the person’s relationship with the other party; and
• the extent to which the person has undermined, or denied the other party, a benefit of any agreement.

Parties to existing agreements should be on notice that the obligation to deal in good faith applies to the renegotiation of an existing agreement where a provision relating to the price of that agreement is varied while the Gas Code is in force.

(b) Other mandatory conduct provisions

The Gas Code includes the introduction of mandatory 'conduct requirements', which establish minimum process and conduct standards for commercial negotiations.  These conduct requirements largely reflect those in the existing voluntary code of conduct.

The process and conduct requirements under the Gas Code significantly impact parties’ discretion in relation to commercial negotiations and the terms of any supply agreement.  They include:

• EOI processes:
  • a minimum 20 business day period in which EOIs must be open;
  • a minimum 25 business day period in which responses to EOIs must be open; and
  • a requirement that suppliers publish EOIs on their website.
• Mandatory requirements on EOI processes and bilateral negotiations commenced outside of an EOI process:
  • ‘initial offers’ and ‘final offers’ must remain open for at least 15 days (unless otherwise agreed in writing between the parties) and include details regarding the quantity of gas intended to be supplied, intended degree of flexibility, term length, delivery points, price or price structure and whether the supplier intends to provide transportation or storage services;
  • an ‘initial offer’ is an offer which, if accepted, would not constitute a binding agreement but would instead form the basis for ongoing negotiations.  A ‘final offer’ is an offer which is in a form that is capable of being accepted and which, if accepted, gives rise to a binding agreement for the supply of gas; and
  • ‘initial offers’ and ‘final offers’ must not be withdrawn or terminated by a supplier unless the buyer withdraws, the supplier and buyer mutually agree to the withdrawal or there has been a material change in the supplier’s circumstances resulting in the inability of the supplier to supply the gas in accordance with the ‘initial offer’ or ‘final offer’ (as applicable).
• Mandatory requirements and minimum terms for gas supply agreements:
  • suppliers must make a ‘final offer’ in relation to a proposed gas supply agreement before entering into the agreement;
  • gas supply agreements must include details regarding the quantity of gas supplied under the agreement, the degree of flexibility, term length, delivery points, price or price structure, payment terms, variation and termination terms, consequences of breach and procedures for resolving disputes that arise under the agreement; and
  • parties must provide the ACCC with copies of any gas supply agreements entered into while the Gas Code is in effect.

The mandatory process and conduct requirements relating to EOIs and the making of initial and final offers are extensive and limit the commercial discretion of suppliers and buyers in relation to gas supply agreements. 

We suggest industry participants familiarise themselves with these requirements and obtain advice as to whether they apply to their activities well before the expiry of the transition period on 11 September 2023.

(c) Uncontracted gas publication and reporting requirement

The Gas Code requires suppliers to publish on their on their websites, and provide the ACCC, with information regarding any gas EOIs the supplier intends to offer, volumes of uncontracted gas that is likely to be available to the supplier, and volumes of uncontracted gas that the supplier intends to be the subject of an EOI or initial or final offer or be the subject of a gas supply agreement.

The time horizon for this reporting requirement is 24 months.  The first publication date for information is after the expiry of the transition period on 11 September 2023, and will be subsequently set out in an ACCC determination.  In making such a determination, the ACCC must consult with the public and take into account consultation comments.

(d) Other record keeping and reporting requirements

The Gas Code sets out a number of record keeping and reporting obligations that are designed to support the ACCC’s compliance monitoring and enforcement activities.  These obligations include:

• requiring suppliers to make written records of particular details in a form approved by the ACCC and to keep those records for certain periods of time (generally 6 years).  This includes all gas EOIs and initial and final offers issued by a supplier and all documents and information exchanged between the supplier and potential purchaser relating to these EOIs, initial and final offers.  Supplier must also keep records of each gas supply agreement entered into by the supplier;
• requiring suppliers who are also retailers to report certain information to the ACCC;
• requiring small suppliers who produce less than 100 PJ of gas per year to provide certain information to the ACCC to demonstrate that the deemed exemption for small suppliers still applies.  Small suppliers are also required to notify the ACCC if they form an intention to enter into an agreement to supply gas to another person who intends to export that gas from Australia.

The ACCC is permitted under the Gas Code to disclose information collected by it to the Treasurer, the Energy Minister, the Resources Minister, the Industry Minister and their departments for use in administration of the Gas Code, the Australian Domestic Gas Security Mechanism and development of relevant policy.  The purpose of this is to avoid the need for any Federal department to have to re-collect the information and impose additional regulatory burden.

Exemptions framework

The Gas Code sets out a detailed exemptions framework, which is aimed at incentivising supply into the domestic market on reasonable terms.  The Gas Code includes both deemed and conditional exemptions.

• Deemed exemptions from the pricing provisions of the Gas Code automatically apply to small suppliers who produce less than 100 PJ of gas annually and who supply all of that gas into the domestic market. 
• Deemed exemptions also apply to:
  • offers and agreements where the gas is offered, or agreed to be supplied, to persons who intend to export the gas from Australia as LNG;
  • foundational agreements and gas master supply agreements.  This deemed exemption only exempts parties from certain procedural requirements and not the pricing or good faith provisions;
  • retailers.  To qualify for this exemption, a retailer must hold a retail licence or authorisation (as applicable) and no more than 50% of its annual turnover can relate to the production, supply and acquisition of gas within the most recent financial year;
  • mandatory government agreements, gas swap agreements, gas exchange transactions and gas trading exchange transactions.
• Conditional exemptions from the pricing provisions of the Gas Code are available to any supplier not covered under a deemed exemption.  To obtain a conditional exemption, suppliers must apply to the Energy Minister who, together with the Resources Minister, will have responsibility for making exemption decisions:
  • suppliers seeking an exemption from the price rules will be expected to offer commitments to meet the policy intent and justify the exemption.  These commitments could relate to volume, price, new production and conditions on how gas is offered to the market or other similar matters;
  • an exemption may be granted if the Ministers are satisfied that it is appropriate to grant the conditional exemption; and
  • in deciding whether the exemption and its conditions are appropriate, the Ministers may have regard to certain matters set out in the Gas Code.  These matters relate to the promotion of competition and the affordability and availability of gas on reasonable terms in the east coast gas market.

A limited conditional exemptions pathway from non-price penalty provisions is also available for businesses unintentionally captured by Gas Code provisions, or where the provisions cannot reasonably operate as intended.  

Application forms for conditional Ministerial exemptions are available on the Department of Energy’s website, which also contains further information for prospective applications regarding the conditional exemption application process. 

The exemptions framework under the Gas Code is extensive and whether or not a person is eligible for a deemed or conditional exemption will depend on the particular circumstances of each case.  We recommend industry participants familiarise themselves with the exemptions framework and seek advice if necessary to determine their eligibility.  

Penalty regime

The Gas Code establishes a strict penalty regime. 

Maximum penalties under the Gas Code mirror those under the CCA and Australian Consumer Law, which are $2.5 million for individuals and, for corporations, the greater of:

• $50 million;
• if the court can determine the value of the benefit obtained, three times the value of that benefit; or
• if the court cannot determine the value of the benefit obtained, 30% of the body corporate's adjusted annual turnover during the breach turnover period of the offence, act or omission.

The provisions of the Gas Code that attract the maximum penalties include the pricing provisions and good faith obligations.  Lesser penalties apply to breaches of the procedural and record keeping provisions.

There is also a detailed an anti-avoidance regime in place under the new Part IVBB of the CCA that applies to any person who participates in a scheme to assist a gas producer or its affiliates to avoid the application of a civil penalty provision in the Gas Code or temporary price cap.  Under Part IVBB, the ACCC is conferred with investigation powers and can issue infringement notices and give public warning notices to companies who contravene the civil penalty provisions.

Enforcement of the Gas Code is a key ACCC priority

The ACCC’s enforcement and compliance priorities for 2023/2024 include competition and pricing issues in gas markets, including compliance with the temporary price cap order and other legal obligations for wholesale gas markets.

Indeed, in a March 2023 speech ACCC Chair Gina Cass-Gottlieb flagged that the ACCC expects that monitoring and enforcing compliance with the Gas Code and temporary price cap will form a “substantial share” of the ACCC’s compliance and enforcement efforts in the energy sector over the next year.  These sentiments were echoed by ACCC Commissioner Anna Brakey when introducing the ACCC’s June 2023 Gas Interim Inquiry Report who stated that the ACCC is ready to use its “full enforcement powers” in response to any possible contraventions.

As noted above, the ACCC published its compliance and enforcement guidelines on the temporary price cap in June 2023.  The ACCC is expecting to publish its Gas Code compliance and enforcement guidelines shortly. 

No public enforcement actions have to date been taken against suppliers for non-compliance with the temporary price cap since its introduction on 23 December 2023.  Compliance with the Gas Code is required following the expiry of the transitional period on 11 September 2023. 

Industry participants are encouraged to use the time before this date to familiarise themselves with the different provisions of the Gas Code and seek advice if necessary as to whether the penalty provisions of the Gas Code apply to their business activities. 

Reflections on the Federal Government’s intervention into the domestic gas market

In December 2022, the Federal Government described the introduction of a $12 / GJ twelve month price cap on gas sold by producers in the east coast market as an “emergency, temporary” measure to combat rising energy prices.

More than 6 months later, the commencement of the Gas Code will extend the $12 / GJ price cap until at least 2025, when the ACCC may review and set the price cap for another two years (unless otherwise permitted).  The commencement of the Gas Code will also see the introduction of a range of mandatory process and conduct requirements on domestic suppliers and buyers in the east coast market, which will significantly limit the commercial discretion of parties negotiating supply agreements.

The commencement of the Gas Code will also follow the introduction of the Federal Government’s reforms to the Australian Domestic Gas Security Mechanism (ADGSM) that commenced on 1 April 2023.  The reforms include allowing the Minister to activate the ADGSM and prohibit exports of LNG during a domestic shortfall every quarter, rather than on an annual basis.

Earlier this month, the Federal Government described that the Gas Code will “secure more gas at more reasonable prices for Australian gas users”.  However, recent reports have suggested that only approximately 6% of total east coast production (which includes LNG) will be covered by the pricing rules of the Gas Code.  This is likely as a result of most producers seeking to exempt themselves from the pricing provisions of the Gas Code through the operation of the deemed and conditional exemptions framework, which are designed to incentivise domestic supply commitments.

While there are questions over the extent of the Gas Code’s application, what is clear is that these regulatory changes show the Federal Government’s willingness to intervene in the domestic gas market in Australia, particularly in light of any potential supply challenges. 

The provisions of the Gas Code apply from 11 September 2023.  Large domestic gas producers and industry participants should familiarise themselves with the various provisions of the Gas Code and its application, and consider what processes are required to ensure compliance.  Domestic gas producers should also use this time before the commencement of the Gas Code to familiarise themselves with the exemptions framework, including seeking advice if necessary, to see if any deemed exemptions or conditional exemptions may apply.

Please contact any of the people listed below if you need advice, or if you require more information about the Gas Code and the Federal Government's intervention in the domestic gas market.