20 July 2016
by Michael West
Gas cartels having a field day on Australian consumers
Australia's energy prices continue to soar while our gas customers ship our gas thousands of miles and still pay less than we do.
In Japan, they pay a lot less for Australian gas than we do in Australia.
Last month, the spot price in Japan was US$4.27 (AU$5.67) per gigajoule (GJ) whereas the average spot price paid in Sydney, Brisbane and Adelaide in June was US$6.87/GJ.
Australian consumers paid, on average, 60% more for gas produced in Australia than did our customers in Japan.
This is even more bizarre when you consider that, before the gas is shipped 6,000 kilometres to Japan at a cost of US$0.75GJ, it first has to be liquefied at an LNG plant at a cost of US$1.50/GJ.
We are being skewered — every consumer and every business which uses gas is being gouged. Spiralling energy prices – electricity costs have doubled in recent years too – are all part of the train wreck which is Australia’s energy policy.
Not only is our East Coast gas market controlled by a cartel of three producers, Santos, Origin Energy and the Exxon/BHP marketing nexus in the Bass Strait but gas distribution is also controlled by a fabulously profitable pipeline troika.
Australian Energy Regulator (AER) data shows the return on equity of one pipeline asset is a dazzling 159% – the sort of return which would have been quite acceptable to Joaquin “El Chapo” Guzman’s Sinaloa Cartel in Mexico.
As pensioners shiver this winter – “energy poverty” is on the rise – the gas cartel may also send more manufacturing businesses in Australia to the wall, or drive them offshore, as has been the case with leading fertiliser group Incitec.
East Coast gas market has all the hallmarks of a cartel
The spot gas market run by the Australian Energy Market Operator (AEMO) is illiquid, lacks depth and is tightly controlled by the three dominant players. Although they call it a “market”, it is not really a market at all. A real market requires transparency and price discovery. This is a cartel and cartel prices recently spiked to US$14.40/GJ on 5 July.
To lend global perspective, the average spot price on that day, 5 July, of US$10.80/GJ, was more than three times the spot price of $US2.69/GJ on the same day in the U.S., where there is a true market.
Yet, it is not merely against the efficient U.S. market where Australian gas prices seem grossly inflated. Our largest export market is Japan. On that same day in Japan the contract price was US$7.23/GJ.
Besides the stranglehold of the producers’ cartel, gas prices have shot up because the transmission system in Australia – ;that is the pipelines – is extremely expensive.
Gas transmission is dominated by the pipeline-owner APA Group.
APA is one of the very best performers on the Australian Securities Exchange (ASX). Since floating in 2000, its shares have delivered investors a return of 1304%. In share market vernacular, this is a “13-bagger”, increasing in value 13 times its original investment in 15 years. A truly phenomenal run and a credit to management.
Their shareholders’ gains though have been their consumers’ losses.
APA’s outsized returns
How does an essentially dull business deliver such scintillating profits though? It runs unregulated monopolies charging its customers monopoly prices.
The recent Australian Competition and Consumer Commission (ACCC) 'Inquiry into the east coast gas market, April 2016', produced a number of examples of price gouging by the monopoly gas transmission providers. The other two are Jemena and QIC.
While the ACCC did not name the offenders, its dominance suggested to most observers, including APA itself, that APA must have been one of them. For its part, APA denies predatory pricing, instead putting its success down to lifting pipeline capacity, getting more gas through its artery of pipes and other infrastructure.
Chief executive, Mick McCormack told the audience at an industry dinner in Sydney last week transmission charges made up only five to 10% of retail gas prices:
Ominously, he also flagged a research report from investment bank JP Morgan estimating prices would rise a further 40% over the next decade.
Responding to questions for this story, an APA spokesperson said the group was making the same rate of return as it did when it listed, saying the 66% rise in prices was mostly due to the effect of trebling of demand from the three LNG projects at Gladstone in Queensland, (offshore demand had sucked away domestic supply).
The statement outlined:
In its inquiry ('Inquiry into the east coast gas market, April 2016'), the ACCC noted (p100) many examples of price gouging in the transmission industry and it found that price rises would not have been nearly so rampant if the monopolies were regulated.
Lest we be accused of selective quotation, the ACCC goes on to detail a selection of pipeline augmentation projects carried out in the last two to three years in the following graph. The Australian Energy Regulator has a benchmark return on equity for 2013-15 on such regulated projects of 7.1% to 8%. For the weary consumer though, these projects were not regulated.
Only one of the projects came in under the AER’s benchmark. The expected returns on these projects being 1.4 to 20 times higher than the benchmark return – with the most extreme example producing a staggering return on equity of 159%.
The lack of regulation of many of APA’s gas transmission pipes is in stark contrast to the situation in Europe, New Zealand and the bastion of capitalism, the U.S..
It appears that overseas, even in the U.S., it is recognised that monopolies need to be regulated.
In the U.S., all major interstate transmission pipelines are regulated unless the pipeline operator can demonstrate that it lacks significant market power. No pipelines have been able to demonstrate this to date.
Even in the U.S., it is recognised that monopolies need to be regulated.
The U.S. market also demands high levels of disclosure by pipeline operators. They must report on a quarterly and annual basis:
- the pipelines balance sheet, cash flow statement and profit and loss
- detailed information on the value of the pipeline’s assets and accumulated depreciation
- detailed information on the revenue received for transportation, storage and other services and volumes transported
- detailed information on the costs incurred in the provision of services, including the cost of any capital works under construction.
In contrast, customers wanting to use a transmission pipeline in Australia must head into negotiations essentially blind to any of these negotiating tools. The market in Australia is completely opaque with all the information withheld by the transmission companies.
Our governments and regulatory bodies allow this price-gouging, even defend it, despite the encroaching scourge of energy poverty and the deleterious effect of high gas prices on the economy overall.
Globally, the price of gas, along with tumbling crude oil prices, has been crashing but in Australia prices have been marching steadily higher. On the spot market on 30 June, the price even touched AU$29GJ.
To conclude with one of our favourite themes, tax, APA did not pay tax last year despite its $1.5 billion in income. It received a refund of $141,000 in the prior year. APA forecasts it will pay tax and booked a $171 million tax expense through its income statement. Due however to its complex stapled trust structure, it is incumbent on its trusts’ members to pay the tax, many of whom are domiciled overseas or who are super-funds paying half the corporate tax rate.