NSW Gas Retail Competition Working Group

Report to Minister for Industry, Resources and

Energy

31 March 2016

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Table of contents

Executive Summary ..................................................................................................................................... 3

Background ................................................................................................................................................. 4

Complementary work already underway .................................................................................................. 4

Opportunities for developing the NSW retail gas market ............................................................................. 6

Potential actions for the NSW Government to consider in promoting retail gas competition .................... 9

Roadmap for increasing competition in the NSW retail gas market .............................................................10

Appendix A: Terms of Reference .................................................................................................................11

Background .............................................................................................................................................11

Objectives ...............................................................................................................................................11

Outputs and Timeframes ........................................................................................................................11

Meeting commencement ........................................................................................................................11

Membership ...........................................................................................................................................11

Governance ............................................................................................................................................11

Appendix B: About the NSW Gas Retail Competition Working Group ..........................................................12

Background .............................................................................................................................................12

Members ................................................................................................................................................12

Secretariat ..............................................................................................................................................12

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Executive Summary

In the context of the NSW Government’s commitment to deregulate retail gas prices in NSW, the Minister

for Industry, Resources and Energy established the NSW Gas Retail Competition Working Group (the

Working Group) to:

Look at barriers to competition in the NSW small customer market (that is, households and small businesses), with a particular focus on regional NSW; and

Develop a set of actions (roadmap) for the NSW Government to consider in reducing barriers to competition in the NSW retail gas market.

The Working Group met three times – 19 October 2015, 15 December 2015, and 16 February 2016.

This paper provides an overview of the main barriers to competition and a set of actions to strengthen

competition for consideration by the NSW Government. Stakeholders have acknowledged that many of the

proposed actions will require the NSW Government to work with other parties. Cooperation between

jurisdictions and stakeholders will be needed for successful reform. There are also aspects of the gas

market that are commercial in nature and therefore, may be better dealt with by private parties.

The findings and observations of this Working Group are diverse and represent feedback from a range of

stakeholders across the supply chain. Therefore, the information in this paper is collated based on

discussions and feedback provided by the Working Group members.

The Working Group sets out three workstreams for Government action in regards to strengthening retail

gas market competition:

1. Timely and successful completion of existing work streams

2. Supporting vulnerable customers

3. Customer engagement

In the body of this report, detailed actions are listed under each of these workstreams. These actions

reflect feedback from individual Working Group members.

The last meeting of the Working Group was on 16 February 2016. This paper reflects the developments in

the market up to this time.

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Background

Complementary work already underway There are a number of projects and reviews currently underway, which are likely to impact on the NSW gas

market. These projects and reviews are looking at a range of issues from technical, everyday transaction

procedures to larger issues of market design.

Harmonisation of the business to business (B2B) procedures

The Australian Energy Market Commission (AEMC) in its 2015 Competition Review identified the lack of

harmonised B2B Procedures as a barrier to competition in the NSW retail gas market. The B2B procedures

in the Retail Market Competition Procedures (NSW and ACT) published by the Australian Energy Market

Operator (AEMO) outline how retailers and distributors communicate and work together to perform

actions in the market such as switching a customer from one retailer to another retailer.

The B2B procedures for distribution networks in NSW differ from the procedures in other jurisdictions. This

adds to the cost of doing business in NSW as different information technology systems are needed.

AEMO and market participants are currently in the process of harmonising the NSW B2B procedures, which

are schedule for completion by May 2016.

Inclusion of the Shoalhaven in the Retail Market Procedures

Customers in the Shoalhaven region are currently unable to switch retailers as there is no mechanism for

transferring customers under the Retail Market Competition Procedures (NSW and ACT). The NSW

Department of Industry, AEMO, ActewAGL Retail and Distribution, AGL, and Jemena Gas Networks are

working together to make changes to allow the Shoalhaven to be included in the Retail Market Competition

Procedures (NSW and ACT).

Australian Energy Market Commission (AEMC) East Coast Wholesale Gas Markets and Pipeline

Frameworks Review

The Council of Australian Governments (COAG) Energy Council has directed the AEMC to review the design,

function and roles of facilitated gas markets and gas transportation arrangements on the east coast of

Australia. The Stage 1 Report was considered by the Energy Council in on 23 July 2015. The Council agreed

to:

Improve price transparency through a gas price index to be implemented by December 2015;

Identify additional information gaps that can be addressed to enhance pipeline capacity trading;

and

Submit a rule change request to harmonise the start time of the “gas day”.

In Stage 2 of the Review, the AEMC is looking at options to promote long-term gas market development,

including:

Reviewing the efficiency of the wholesale gas markets;

Maximising pipeline trading capacity; and

Establishing a one-stop shop for gas market data.

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Australian Competition and Consumer Commission (ACCC) East Coast Gas Inquiry 2015

The Australian Government has directed the ACCC to commence a 12 month public inquiry into the

competitiveness of wholesale gas prices in Eastern and Southern Australia. Specifically, the ACCC will

consider:

The availability and competitiveness of offers to supply gas and the competiveness and

transparency of gas prices;

The competitiveness of, access to, and any restrictions on market structures for gas production, gas

processing and gas transportation;

The significance of barriers to entry into the upstream production sector;

The existence of, or potential for, anti-competitive behaviour and the impact of such behaviour on

purchasers of gas; and

Transaction costs, information transparency including gas supply contractual terms and conditions,

and other factors influencing the competitiveness of the markets.

The inquiry is due to report to the Commonwealth Government by April 2016.

Commonwealth Government 2015 Energy White Paper

The Commonwealth Government’s 2015 Energy White Paper outlines some high-level principles for

improving gas market competition:

Regularly reviewing competition laws.

Regular market monitoring, with a particular focus on inefficiencies and potential barriers to

competition, and also monitoring prices, costs and profits.

Encouraging privatisation of state-owned energy assets.

Fast-tracking the approval of priority gas projects.

Encouraging CSG and other unconventional gas activities.

Improving gas market information and supporting trading hubs like Wallumbilla.

Managing natural gas supply interruptions.

Encouraging liquidity and greater pipeline access in the gas market.

Engaging with local communities by promoting best-practice guidelines, transparent regulations

and data sharing, facilitating the coexistence of resources and energy development alongside

agriculture, and improving public communication.

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Opportunities for developing the NSW retail gas market

The Working Group proposes the following high level principles, to inform the NSW Government’s

approach to NSW gas market reform:

Commercial transactions should not be priority areas for intervention.

Any NSW Government led reform should not duplicate existing work being undertaken in the

market.

Where appropriate, market reform should be driven by industry (in consultation with consumer

stakeholders) instead of through regulatory processes.

Reform should support better outcomes for consumers.

NSW gas market reform does not occur in isolation of the rest of the east coast gas market, or even the

Victorian declared wholesale gas market. The Working Group identified four separate, but related, areas

that present challenges to expanding retail gas competition in parts of the NSW retail gas market:

Pipeline capacity and access to gas.

Customer base and the cost of new connections.

Uncertainty about wholesale gas prices.

Retailer participation in the market.

Anecdotally, some new retailers have found it difficult to purchase capacity on pipelines throughout NSW

generally, which are already congested. Capacity refers to retailers purchasing the right to transport gas

through a transmission pipeline.

Transmission pipelines which transport the vast majority of gas consumed in the NSW retail market are

subject to the gas access regime under the National Gas Law, and a party may apply for an asset to be

subject to economic regulation under this regime. Where no spare capacity is available on a pipeline, a

new retailer can enter into an agreement with the pipeline owner to expand the asset. Alternatively, a new

retailer can obtain access to a pipeline by purchasing capacity from another owner of pipeline capacity

(known as secondary capacity trading).

These arrangements are currently under review by the ACCC and AEMC. The ACCC review focusses on a

number of matters, including:

The competitiveness of, access to, and any restrictions on market structures for gas production, gas

processing and gas transportation; and

The existence of, or potential for, anti-competitive behaviour and the impact of such behaviour on

purchasers of gas.

The work currently being undertaken by the AEMC and the ACCC may address potential barriers. While

final reports are yet to be delivered, where barriers to or opportunities for improving competition are

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identified, the NSW Government has the opportunity to drive prompt responses to these reviews through

the COAG Energy Council.

In regional markets, the limited size of the customer base affects the viability of developing a competitive

retail gas market as the ability to recover costs from market entry is recovered from a smaller customer

base. This impacts the risk/reward ratio for retailers.

Other establishment costs (for example, registration with AEMO, obtaining transmission haulage to the

network recipient points, procuring gas; and procuring supply hedges to offset market risks) and network

expansion plans influence the rate of expansion of the customer base for new connections.

From the customer’s perspective, those who are not currently connected to the gas network face the

establishment costs of moving to gas, including the replacement of key appliances (for example, ovens,

cooktops, hot water systems and room heaters). These costs pose a significant disincentive to changing to

gas. A similar barrier may exist for customers using Liquid Petroleum Gas (LPG) who may be considering a

shift to natural gas. The benefit for customer switching from LPG to natural gas however could be access to

customer protections under the National Energy Retail Law and NSW Gas regulatory framework, and access

to the NSW Gas Rebate for eligible customers.

LPG however, should not be discounted as an alternative fuel source. LPG helps support competitive

tension between different heating options. The NSW Government could consider a rebate for LPG

customers, similar to the NSW rebates available for other vulnerable customers, including those who are

not direct customers of an authorised retailer (such as residents of retirement villages and residential

parks). The Victorian experience shows however, that take up of the Victorian equivalent of an LPG rebate

(and emergency relief assistance) may be low due to lack of customer awareness about the existence of the

rebate. Should a new rebate be introduced in NSW, a widespread education campaign would be essential

to facilitate customer take up of the rebate.

While the NSW Government does not have a role in the commercial aspects of a retailer’s operations, it can

play a role in educating consumers about the availability of connecting to natural gas in their area.

An education campaign, similar, to the “Power’s in Your Hands” mass media education campaign for

electricity, could help to educate the market, especially those from disadvantaged backgrounds and

locations, to make considered decisions about energy purchase and consumption. However, if the

Government does decide to adopt an education campaign for gas retail price deregulation, consideration

should be given to the differences between gas and electricity retail market structure. In particular, unlike

electricity, the majority of gas retail customers are already on market contracts. The media campaign’s

messaging would need to focus on the particular needs of each regional community.

Whether retailers develop products for areas with a small customer base is also impacted by changes in the

way retailers procure gas. This is driven by the uncertainty in the wholesale gas market which has seen a

shift from long term gas supply contracts, to contracts for a shorter period of time. This uncertainty poses

potential wholesale price risks for local retailers. Removing retail price regulation is expected to mitigate

this risk.

Despite the relatively large number of retailers authorised to sell gas in NSW, only a small number of these

authorised retailers have offers in the market. There also appears to be a lack of product differentiation

among the available offers.

The complex transfer and B2B processes were also identified as a barrier. As mentioned previously, B2B

harmonisation is due to be completed by May 2016.

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An opportunity for addressing this barrier would be aiming to simplify the paperwork to become a gas

participant, where possible. This is to encourage more retailers and other parties to enter the market.

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Potential actions for the NSW Government to consider in promoting retail gas

competition

To address the above barriers, a number of actions were put forward by various working group members:

1. Drive prompt response to the AEMC and ACCC reports through the COAG Energy Council,

prioritising actions that reduce barriers to pipeline access and new retailer entry.

2. Consider whether the expansion of rebates to liquid petroleum gas (LPG) would have a meaningful

impact on competition, particularly examining the extent to which regional consumers actually

substitute between reticulated natural gas and LPG.

3. Solutions to support vulnerable customers’ choice of fuel should not lock customers in to using gas

at a time of uncertain pricing and supply.

4. Develop and implement an education campaign, with a regional focus. Similar, but different, to the

“Power’s in Your Hands” mass media education campaign for electricity, an education campaign

could help to educate the market, especially those from disadvantaged backgrounds and locations,

to make considered decisions about energy purchase and consumption. An education campaign

could also inform regional customers that gas is available in their area and could help prompt

switching and/or new connections; however a mass media campaign would not necessarily be

appropriate. Instead, the media campaign’s messaging would need to focus on the particular needs

of each regional community.

5. Retail gas price deregulation.

6. Pursue the alignment of the pipeline and short term trading market (STTM) nominations timings to

allow daily gas market to set the price prior to notifying the pipeline/upstream gas supplier of the

volume of gas required to be shipped. This is to make it easier to develop a daily price market.

7. Aim to simplify the paperwork to become a gas participant, where possible. This is to encourage

more retailers and other parties to enter the market.

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Roadmap for increasing competition in the NSW retail gas market

Based on the barriers and actions discussed by the Working Group as set out above, the Working Group

identified three broad areas for prioritisation by the NSW Government. The detailed actions under each

workstream reflect proposals by individual Working Group members.

Three areas for prioritisation

Timely and successful completion of existing work streams:

o Smooth and timely completion of transfer of the AEMO B2B harmonisation for the NSW gas

market

o Removal of barriers to entry to the Shoalhaven market

o Prioritise work through COAG Energy Council to improve competition

o Deregulate retail gas prices

o Pursue the alignment of the pipeline and short term trading market (STTM) nominations

timings to allow daily gas market to set the price prior to notifying the pipeline/upstream

gas supplier of the volume of gas required to be shipped. This is to make it easier to

develop a daily price market.

o Look at options for reducing regulatory burden (i.e. simplify the paperwork) for becoming a

gas retailer

Supporting vulnerable customers:

o Provide information to customers about energy efficient appliances and most effective fuel

source

o Consider whether a rebate for liquid petroleum gas (LPG) would help support competitive

tension, as an alternative fuel source in regional markets.

Building consumer engagement through an education campaign. This campaign would:

o Develop targeted messaging for each regional area, based on the particular need for that

region

o Provide information on gas affordability and selecting the most efficient and cost effective

fuel source for small customers

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Appendix A: Terms of Reference

Background Competition in the retail energy markets in New South Wales is a key priority for the NSW Government.

The Australian Energy Market Commission (AEMC) Competition Review found that competition is effective in the NSW retail gas market in most areas of NSW. There are however, some regional pockets, for example, Wagga Wagga and the Shoalhaven, where there is little or no competition.

Competition is the most effective customer protection in a deregulated market. The objective of the working group is to develop a road map for the NSW Government to consider, in addressing the barriers to competition in the NSW retail gas market.

Objectives The NSW Gas Retail Competition Working Group will look at barriers to competition in the NSW small customer market (that is, households and small business). The working group will include a particular focus on regional NSW.

The working group will include a particular focus on regional NSW, and will:

Discuss the known barriers to retailers entering the NSW retail market and whether they still exist. This discussion will be based on the AEMC’s competition reviews from 2013 to 2015.

Discuss any barriers that have not yet been identified. This will provide participants with an opportunity to share their experiences.

Develop a set of actions (roadmap) for the NSW Government to consider in reducing barriers to competition in the NSW retail gas market.

Outputs and Timeframes The NSW Gas Retail Competition Working group will be required to produce a roadmap of recommendations for addressing barriers to competition in the NSW retail gas market. This roadmap must be provided by the end of January 2015 will be provided to Cabinet for their consideration.

Meeting commencement Aiming for late October 2015 in Sydney.

Membership Due to the complex and interwoven nature of the gas market, stakeholders from across the entire supply chain, as well as market bodies, have been invited to participate in the working group. This includes the regulated offer retailers, other gas retailers (with a National Retailer Authorisation for NSW), pipelines, the Energy and Water Ombudsman NSW, Energy Retailers Association of Australia, Public Interest Advocacy Centre, the Independent Pricing and Regulatory Tribunal, the Australian Energy Market Operator, the Australian Energy Market Commission and representatives from NSW Government agencies.

Large customer representatives, who were members of the Minister for Industry, Resources and Energy’s Gas Users Advisory Council (GUAC), have also been invited to attend the working group. This recognises the valuable work previously undertaken by the GUAC on gas supply issues, which will enhance the discussion for the retail market in NSW. Large customer representatives will also be able to help identify whether options discussed for removing barriers in the retail market would have unintended impacts for large users.

Governance The Department of Industry, Division of Resources and Energy will provide the Chair, secretariat, meeting venue and conference call facility for the working group.

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Appendix B: About the NSW Gas Retail Competition Working Group

Background On 1 October 2015, the Minister for Industry, Resources and Energy announced that the NSW Government

would deregulate retail gas prices from 1 July 2017, subject to certain conditions being met. The Working

Group was established to develop a road map for reducing barriers and improving competition in the NSW

retail gas market.

Members

Retailers:

o AGL (regulated retailer)

o ActewAGL (regulated retailer)

o CovaU

o EnergyAustralia

o Lumo Energy

o Dodo/M2 Group

o Origin Energy (regulated retailer)

o Red Energy

Transmission and distribution networks:

o Jemena Gas Networks

o APA

o Australian Gas Networks

o ActewAGL Distribution

Stakeholder representative groups:

o Energy Retailers Association of Australia (ERAA)

o Public Interest Advocacy Centre (PIAC)

o Energy Users Association of Australia (EUAA)

Large customers:

o Orora Limited

o CSR Limited

o Manufacturing Australia

Market bodies:

o Australian Energy Market Operator (AEMO)

o Australian Energy Market Commission (AEMC)

o Independent Pricing and Regulatory Tribunal (IPART)

NSW Government agencies:

o Department of Premier and Cabinet

o NSW Treasury

o Office of the Small Business Commissioner

o Department of Family and Community Services

o Department of Industry

Other:

o Energy and Water Ombudsman NSW (EWON)

Secretariat

Secretariat functions were provided by the Department of Industry, Division of Resources and Energy.