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APGA addresses the inquiries

The APGA has written a couple of times in The Australian Pipeliner about the number of reviews and inquiries being held to investigate gas markets. This year has seen the two “˜reviews to end all reviews’ and the APGA has been actively participating in both.

The Inquiry with the greatest ability to investigate matters of competition in the gas market is the Australian Competition and Consumer Commission’s (ACCC) East Coast Gas Inquiry, which has legal powers to mandate information provision and call witnesses to provide testimony.

The Chief Executive and I made an appearance at the Sydney Public Hearing and were asked a range of questions focusing on access to pipelines, service pricing and transparency.

Below is the opening statement made by Cheryl Cartwright at the start of proceedings.

The full transcript is available online at the ACCC’s website.

APGA Opening Statement to the Public Hearing of the ACCC’s East Coast Gas Inquiry Sydney, 31 August 2015

The APGA thanks the Commission for this opportunity to directly address the East Coast Gas Inquiry.

APGA is the peak body representing Australia’s gas transmission industry. Our members build, own and operate the gas transmission infrastructure connecting Australia’s gas supply basins and demand centres.

We would like to make these specific points:

    • The contract carriage framework has allowed the gas transmission industry to develop services and infrastructure in response to market requirements. This industry activity has created the east coast gas grid.

 

    • There has been a strong focus on pipeline capacity, and the pipeline industry has responded with new services and platforms to facilitate enhanced trade. A strong secondary market will take time to fully develop and without an increase in supply, no amount of capacity availability or trading will increase the amount of gas available to end users.

 

  • Liquidity in gas supply will come through more competition – that means more producers, and more supply agreements containing increasingly flexible options. Already, pipeline contracts have become more flexible in response to changing market requirements.

Now, a little more detail about gas transmission.

Transportation and associated services are sold on an open and non-discriminatory basis through negotiated bilateral contracts.

It is important to recognise the role the transmission industry and private investment have played in contributing to the development of the interconnected east coast gas market.

After an early history largely driven by Government investment, the private sector continued development and investment in pipeline infrastructure and this was enabled by the contract carriage framework.

It is this investment that has led to today’s interconnected east coast gas grid.

Since 1999, new pipelines such as the NSW-Victoria Interconnect, the Eastern Gas Pipeline, the Tasmanian Gas Pipeline, the SEA Gas Pipeline and the QSN Link, have provided access to new markets for producers and increased options for users.

This has materially increased competition in the east coast gas market.

If the North East Gas Interconnector pipeline goes ahead, linking the Northern Territory with the east coast market, it will be a further extension of the east coast grid, opening up more competition in the market.

These investments, like most investments in the natural gas supply chain, were made possible through negotiated, bilateral agreements – primarily long-term contracts.

Long-term contracts are an important risk management and allocation tool in many industries and the gas industry is no exception.

Producers use long-term contracts to secure markets for their capital-intensive production and processing facilities.

Users of gas use long-term contracts to secure supply in order to help justify investment in their facilities.

Pipeline owners use long-term contracts to manage their risk due to lack of control over future gas supply and demand requirements and to secure lower-cost debt financing.

The long-term contracts historically favoured by the gas transmission industry and its customers have been developed through negotiation between large, sophisticated parties.

Consistent with Australia’s competition policy, the National Gas Law is a safeguard in circumstances where negotiated outcomes are unable to be achieved.

Firm capacity provides large gas users with supply certainty for their capital-intensive gas plant.

Firm capacity provides suppliers, whether producers or retailers, with the certainty that they can get gas to markets and meet the needs of their customers at all times.

Firm capacity provides gas transmission companies with the risk management strategy that makes them attractive long-term investments in capital markets.

The Commission is well aware of the structural change under way in the east coast gas market as the development of the three LNG facilities in Gladstone nears completion.

Clearly, the gas market has a new centre of gravity.

The gas transmission industry has responded to this challenge with new investments that deliver increased capabilities to all market participants.

Naturally the customers that enter the long-term contracts that enable the investments have the best opportunity to use these capabilities.

For example, major pipelines are installing capabilities to allow gas to flow in either direction in response to changes in demand.

Major pipelines are expanding to meet exporters’ need for third-party gas.

Major pipelines are building new interconnections to more efficiently facilitate the market’s requirements.

Negotiated third-party access has enabled this investment in new and existing pipelines to occur as it is required, ensuring pipeline capacity is available to meet market needs.

Gas transmission companies are also recognising the market’s changing requirements regarding contract duration.

As supply arrangements become shorter term, transportation arrangements are changing to meet shipper requirements.

As a result, gas transmission companies are demonstrating a willingness to take on more risk, investing in new projects under contract arrangements that are made on shorter terms than the historical average.

The gas transmission industry readily innovates in service delivery and has introduced new services to reflect the increasing capabilities of pipelines and the requirements of market participants.

Shippers have always had the contractual right to trade capacity.

The operational capacity transfer service allows obligations and rights to be more readily transferred between parties when trading capacity.

Capacity listing platforms have been developed to allow parties to signal demand and availability of secondary capacity more transparently.

New services have been introduced to facilitate trades at the Wallumbilla Gas Supply Hub.

Our members tell us there is increasing interest in augmenting arrangements with storage and flexible services.

The transmission industry has also been innovative in responding to policy-makers’ concerns, and developing new services and infrastructure for the market during this period of structural change.

The attention of recent years on secondary capacity largely arose from concerns that the operation of the Wallumbilla Gas Supply Hub, then in development, could be impeded by a lack of capacity trading.

The Hub has now been in place for almost 18 months.

There have been no difficulties in trading gas and, with almost 900 trades already undertaken, it is apparent that capacity trading, has not limited the trading of gas through Wallumbilla.

A strong secondary capacity market provides participants with more flexibility and enhanced risk management options, complementing arrangements in primary markets.

We have put in place a framework to enable development of a strong secondary market.

In developing the capacity trading platforms, the gas transmission industry worked with shippers to develop the services and platforms that they needed to make capacity trades simpler, easier and lower cost.

APGA developed guidelines for these services to ensure they were implemented consistently across the industry.

A strong secondary capacity market will take time to become an established part of the market.

Some market participants and policy makers suggest firm capacity tariffs should be the ceiling for access charges to a pipeline.

They advocate that tariffs for “˜as available’ or “˜interruptible’ services should be lower than for firm services.

Firm services and flexible services are different.

With firm services, pipelines and shippers share volume risk.

With firm services, shippers pay every day and the cost of the service is averaged over an agreed period.

In contrast, shippers pay for flexible services only when they use them.

I take the opportunity to repeat the question asked by the Commission with regard to the pricing of flexible services, “˜What is to be expected in competitive markets?’

In competitive markets, customers making long-term commitments attract favourable terms and conditions.

In the case of primary firm capacity, these favourable terms and conditions are largely lower tariffs and guaranteed access.

Finally, we would emphasise that liquidity in capacity access is meaningless without liquidity in wholesale gas supply.

Enhanced capacity trading does not produce additional supply and it is difficult to see the use of capacity trading increasing without greater availability of gas.

To date, reform processes seem to have actively ignored this fact.

Also ignored is the fact that gas transmission pipelines are not vertically integrated and have every incentive to support competition in markets, both upstream and downstream.

This cannot be said of other infrastructure services essential to the gas supply chain, such as upstream trunk lines, processing facilities and storage facilities.

The key to solving current challenges is enhanced gas supply.

Enhanced gas supply will come through more competition, more producers and more short-term supply agreements containing increasingly flexible options.

This must be achieved in a manner that maintains a positive investment environment for supply chain infrastructure.

As I said at the start of this statement, the gas transmission industry provides services to gas market participants.

A strong, healthy and growing gas market benefits the gas transmission industry.

The gas transmission industry has responded to the needs of market participants in this challenging period and there is every reason to expect it will continue to do so. It is in its best interests to do so

Like this article? It originally appeared in The Australian Pipeliner quarterly magazine – make sure you subscribe here.

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