Transcript: APPEA CEO Samantha McCulloch interview on market intervention with Sky News AM Agenda Host Laura Jayes

Interview with Sky News AM Agenda Host Laura Jayes

Laura Jayes: Gas producers have been put on notice by the consumer watchdog amid confusion over the government’s legislation on energy retailers. Producers have been warned they will be punished if they withhold supply from the domestic market. The ACCC says it will crack down on any suppliers that were running avoidance schemes in order to avoid price caps. It comes after retailers on the eastern seaboard refused to take on new customers. Joining me live now is the CEO of APPEA, Samantha McCulloch. Sam, great to see you, thanks so much. It has been a month now since this price cap has been put in place. What does the current situation tell us about its effectiveness or otherwise?

Samantha McCulloch: Laura, thanks so much for having me. As you mentioned, the price cap has been in place almost a month now – it was rushed through just before Christmas – and at the time the industry raised a number of practical issues and questions about its implementation. We have been waiting for a response from the government on how the price cap will work in practice. That guidance has just been released this morning. That is welcome. We will be working through the detail of that. But really this goes to the level of uncertainty that has been created by these very complex reforms that have been implemented with very little consultation and without really working through the detail of what the reforms mean.

Jayes: So, you only got that guidance this morning – what, in the last couple of hours?

McCulloch: I think about half an hour ago, perhaps, I think it was released. So, we’re now one month into a 12-month price cap and just getting the detail now in terms of what compliance looks like. I just want to explain that while it might sound fairly straightforward, a $12 price cap, the implementation of this measure is really quite complex because it applies to some gas, from some fields, in some markets. We are still seeking clarity around some of the detail of that as an industry and you know failure to comply attracts a $50 million fine for the industry – so it’s very important for the industry that we understand the rules of the game. We want to be supplying to our customers. We value our customers. But we want to also ensure we are complying with these rules that are still being defined by the government.

Jayes: So, you have that guidance now. As you say you got it about half an hour ago, I’m sure you’ve run your eyes over it. It’s going to be a little bit more complex than that. But how far will this guidance go to alleviate some of the problems we see that have come from that price cap being handed down just before Christmas?

McCulloch: We will be working through the detail of the guidance that has been issued this morning. Prior to Christmas, in around mid-December as part of the four-day consultation on these mechanisms, we raised a number of issues and concerns. We then followed up with the ACCC and the Treasury requesting an urgent meeting before Christmas which we held on the 23^rd of December, with up to 18 questions that needed clarification from an industry perspective to enable us to continue to let the market operate and supply gas. We’d welcome the government clarifying those issues hopefully in the guidance released this morning. Let’s just be clear – there are two aspects to the government’s reforms. There’s the immediate challenge now of implementing the $12 price cap in the wholesale market. But there’s also this ongoing proposed regulation of gas prices in Australia through a mandatory code of conduct. That will come into effect later this year. It is making it very difficult for the industry – amidst this immense uncertainty – to be able to invest in new supply projects, to be able to enter multi-year supply agreements that are in compliance with rules that are yet to be defined.

Jayes: So you see some prices going up for gas and some retailers not taking on new customers. Is that just early teething or do you think that is going to be a problem that persists for 12 months or longer?

McCulloch: I think it’s important to understand that firstly the price cap only applies in the wholesale market, not the retail market. But it goes to some of the concerns that the industry and other economists and commentators were raising last year about the implications of these price caps. I think now that we’ve got more detail, if the detailed guidance provided by the ACCC in the last short while can go to some of the questions that have been raised by the industry around the implementation of the price cap, that can be worked through. As I said, the industry values its customers. We want to continue to supply gas. But we need to do that in a way that complies with the new regime. We just need to know what that regime looks like.

Jayes: So we got a bit more clarity this morning. You’re going to take time to work through the detail, as will companies. But it all comes down to supply really. It’s a supply and demand issue here. We’ve seen already Brookfield, the takeover of Origin that seems to be on hold for a second time, there’s also another Queensland company that has decided not to go through with a project and they were specifically citing the government’s intervention here. Does there need to be a redesign or you’re not quite at that point yet?

McCulloch: Well, Laura, I think you are absolutely right. This comes down to supply. The key to bringing prices down in Australia, internationally, is bringing on more supply. We need the investment not just to grow the market but to continue to supply gas at current levels. Our key concern with these reforms and the uncertainty that it’s creating is it’s making it very difficult to invest in new supply projects and that includes to secure finance for new projects, projects that are keen to supply the domestic market and are targeted towards the domestic market and are currently on hold. There is a $1 billion project in Queensland now on hold.

Jayes: So, let me try and distil this down a bit, Sam. Do you think these price caps are workable if you iron out these early problems or do you think they need to be scrapped and the government look at another solution?

McCulloch: Look, we have concerns around the price caps. If it is a temporary price cap that only applies for 12 months, I think that is something that could be workable. But there is immense uncertainty about whether or not that would be extended and the interim the scale of the reforms and the uncertainty around the ongoing regulation around prices and how the gas market will work going forward is really making it very difficult for investment. And we need that investment, we need new supply to bring the prices down. This is what is going to provide relief to Australian households and consumers and manufacturers in the medium and long term.

Jayes: So, it’s all about certainty. Explain this to me: this is only about the domestic market of course. These companies can sell whatever they want, put whatever price they want on the international market when it comes to gas, so it’s still a very profitable business, isn’t it? Don’t you have a responsibility to the Australian domestic market to actually supply it an affordable level?

McCulloch: Let me just make two comments about that. First, our LNG exports particularly on the east coast, are under long-term supply agreements that were struck when those facilities were built. There is only around seven percent of gas exported off the east coast that goes to the spot market that could be enjoying the current high prices that we’re seeing in international markets. And many of APPEA members are smaller members that supply the domestic market only. They do not have an LNG portfolio to offset the impacts, I suppose, of these domestic interventions. The other point I’d make is that the industry was working with the government last year and in previous years to ensure the domestic market was well supplied. So, we struck a Heads of Agreement. This was the three east coast LNG exporters who met with the government, who came to an agreement to supply more than 157 PJ of gas to the east coast market and ensure that gas was offered to the domestic market first. So, the gas industry has been doing its role in terms of ensuring domestic supply but that role is getting harder and harder as we see the impacts of these interventions making it impossible almost to bring on new projects and to bring on the new supply where the demand is. And that means in the southern states. At the moment, Queensland is providing 80% of east coast gas.

Jayes: A gas reservation on the east coast. Would you have a problem with that? Is that something that is workable in the future?

McCulloch: I think the key concern with these interventions is when they’re retrospective in nature. But let’s just be clear while the west coast might have a domestic gas reservation policy of 15%, it’s a very different market to what we see on the east coast. The fact is it is unclear what a domestic gas reservation policy would look like on the east coast when you’ve got major gas using states, New South Wales and Victoria, failing to develop their own gas resources. When we’re not seeing those gas resources are not being developed – whether or not there is a gas reservation policy or not – we’re still going to see challenges around supply.

Jayes: OK, Sam, I think we got through all of that for today at least. We will speak to you again soon.

McCulloch: Thanks Laura.