Commencement of Mandatory Gas Code of Conduct for the East Coast Gas Market

This week, the Federal Government’s Mandatory Gas Code of Conduct for the East Coast Gas Market (Code) ¹ came into effect. The Code is intended to facilitate a well-functioning domestic wholesale gas market with adequate gas supply at reasonable prices, and on reasonable terms for both suppliers and buyers.

James Plumb and Sophie Maitland from HopgoodGanim’s Resources and Energy team discuss the key elements of the Code in this article. 

1. Gas price cap

The gas price cap of $12/gigajoule, originally set as an emergency price order in December 2022 as a temporary measure, will now continue until at least 1 July 2025 under the Code. 

The Code prohibits gas suppliers from entering an agreement to supply regulated gas, or supplying gas under such an agreement, at a price that exceeds a “reasonable price”, which the Code has set initially at $12/GJ. Agreements entered prior to 23 December 2022 remain grandfathered and unaffected by the price cap.

The Australian Competition and Consumer Commission (the ACCC) is tasked with reviewing the price cap in two years’ time, or adjusting the cap within that period if there are substantial changes in market conditions or if the Minister authorises an adjustment. 

In setting future gas prices, the ACCC may consider:

1. the extent to which the price would promote a workably competitive gas market;
2. the affordability and availability of gas;
3. the sufficiency or adequacy of investment in, and production of, gas; and
4. the effect or expected effect of other related decisions or government policies. 
    

2. Exemption framework

The Code provides for several exemptions to the price cap which are intended to incentivise producers to supply gas to the domestic market in a manner that supports access to gas at reasonable prices and on reasonable terms. The exemptions available under the Code are:  

1.  “Deemed Exemptions” which cover producers who produce less than 100PJ of counted gas per year, and supply exclusively to the domestic market. Suppliers to LNG exporters retain the benefit of the exemption if, at the point of sale, the buyer does not intend to export that gas; and
2. “Conditional Exemptions” which may be available on application to all producers. Conditional exemptions will ordinarily require the producer to commit to an enforceable domestic gas supply commitment. The decision to grant a conditional exemption will be jointly made by the Minister for Climate Change and Energy and the Minister for Resources.
    

3. Mandatory conduct requirements

The Code contains mandatory conduct provisions which are aimed at reducing bargaining power imbalances between producers and gas buyers and establishing minimum conduct and process standards for commercial negotiations. 

Good faith provisions under the Code require gas market participants who engage in wholesale gas supply transactions to deal in good faith with each other. These requirements apply to pre-contractual negotiations and post-contractual behaviour, for all bilateral agreements between suppliers and buyers. The Code contains a non-exhaustive list of matters which may indicate a participant has dealt in good faith, including:

1. the extent to which the participant acted honestly;
2. whether the participant tried to cooperate with the other participant to achieve the purposes of the agreement; and
3. the extent to which the participant has not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives.

The Code also imposes standards dealing with processes for expressions of interest (EOIs) to purchase gas (for supply terms of 12 months or more). Producers are required to specify certain matters in EOIs, including the volume and period of supply, delivery point and other key terms and conditions of the sale. The Code does not require producers to release an EOI to bring gas to market or publish an EOI to conduct bilateral negotiations. However, where EOIs are run and notices of interest received, gas producers will ordinarily be compelled to make initial and final offers other than in a limited set of circumstances. 
 

4. Transparency obligations

The Code requires producers to publish information about future planned EOIs and the volumes of uncontracted gas that the producer expects it will have a right to supply, including when and how much gas the producer intends to offer into the east coast gas market. The transparency obligations are intended to increase visibility of the amount of uncontracted gas which may be available to purchase, and when producers will bring that gas to the domestic market. 
 

5. Penalties

The penalty regime under the Code is significant. The maximum penalty for a company that breaches the Code is the greater of $50 million or three times the value of the benefit obtained, or, if that value cannot be determined, 30% of the company’s turnover during the period it engaged in the conduct.
 

Changes to the Exposure Draft

Key additions to the Code since the draft version (the Exposure Draft) was released to the public earlier this year include:

1. the inclusion of a mechanism for the ACCC to determine circumstances in which a producer who has issued an EOI, a gas initial offer or gas final offer may withdraw or terminate it, to allow this part of the framework to evolve over time; and
2. the introduction of the concept of “counted gas” which feeds into, amongst other things, whether a producer is considered a “small producer” for the purposes of the deemed exemption to the price cap. Counted gas for a producer is defined as any regulated gas produced by the producer in the east coast gas market or any regulated gas to which the producer has a right to ownership or the value of sale under an agreement (except pursuant to gas swap agreements or mandatory government agreements).

Additional exemptions from certain requirements of the Code were included for:

1. volume neutral gas swap agreements, to ensure these products continue to facilitate efficient market operation, support balancing and hedging gas supply and deliver additional gas at peak times; and
2. agreements that result from a direction issued by Australian Energy Market Operator under the National Gas Law (referred to as “mandatory government agreements” under the Code).
    

What to do next

All gas producers and suppliers should familiarise themselves with the final version of the Code to determine how and when the Code will apply to their operations. Some of the mandatory conduct requirements and transparency obligations are subject to a two-month transition period, which will end on 10 September 2023.

Producers and gas buyers will also need to carefully consider how to ensure that their pre-contract negotiations and post-contract behaviour will continue to meet the strict requirement of good faith under the Code, and gas producers will also need to ensure that their tendering processes are brought into line with the Code’s express requirements for gas EOIs.

Producers will also need to take steps to ensure that they are able to publish information about future planned gas EOI processes (if required).

For more information about the Code and how it may affect your company’s operations, please contact HopgoodGanim’s Resources & Energy team.

1.   See the Competition and Consumer (Gas Market Code) Regulations 2023