As the government works to get its tax cuts through the upper house, Centre Alliance senators Rex Patrick and Stirling Griff have put a condition on their support, calling for adjustments to the domestic gas security mechanism. By Karen Middleton.
Centre Alliance barters on gas prices
The federal government is considering further measures to ease the financial burden on pensioners and new moves to force domestic gas prices down, in a deal to secure enough senate support to legislate its proposed tax cuts in their entirety.
South Australian senator Rex Patrick and his Centre Alliance colleague Stirling Griff are demanding both steps in return for their votes, along with further assurances from Treasury that the economy can really afford the tax cuts into the future.
On Friday, the government fuelled suggestions that it was ruling out a deal with the crossbench in a bid to wedge Labor and try to force it to capitulate. But The Saturday Paper understands that talks with the Centre Alliance senators are ongoing.
Patrick and Griff argue further relief from household cost pressures should not be restricted to those Australians who pay tax, and that pensioners, in particular, need help beyond the one-off energy payment contained in the April budget.
“Centre Alliance is looking at other measures that make sure it isn’t just people who are still working who are benefiting from the purported strength of the economy,” Patrick told The Saturday Paper this week. “If the government is satisfied that there is sufficient buffer in the surplus, then there should be room to ease costs for pensioners as well.”
Patrick is emerging as a central figure in the new parliament, with the government in need of four extra senate votes to pass legislation.
Alongside him and Griff, the key senate crossbenchers are the Australian Conservatives’ Cory Bernardi, One Nation’s Pauline Hanson and her returning colleague Malcolm Roberts, and Jacqui Lambie.
Bernardi has already said he will back the full tax package. Lambie has been holding talks with Patrick and Griff in what could become a powerful new senate voting bloc.
The Centre Alliance senators are in discussions with Finance Minister Mathias Cormann that began last week in Adelaide. They have put a clear policy price on their support for the tax cuts.
The senators have asked the government to adjust the existing domestic gas security mechanism, which is designed to block producers from exporting gas when domestic supplies get low, so it not only guarantees availability but actually drives prices down.
Centre Alliance negotiated the creation of that mechanism in 2017 when former senator Nick Xenophon was its leader, Malcolm Turnbull was prime minister and domestic gas supplies were falling. It has had some effect, with gas producers maintaining just enough supply to the domestic market to avoid an export ban.
That means the mechanism has never been formally triggered and has also not put any significant downward pressure on prices. Its use is considered annually around November, but supplies are expected to be sufficient again this year to also avoid the trigger. Patrick is concerned the mechanism isn’t doing what it was ultimately meant to do – ease the hip-pocket burden on consumers.
“There were companies in South Australia that could not get a gas contract,” he told The Saturday Paper. “The threat of the use of that mechanism has resolved the problem of supply. But it hasn’t addressed price.”
Senator Patrick wants the mechanism adjusted so it’s triggered when the Australian gas price exceeds that of competitor countries in South-East Asia.
“The aim for me is to get a surplus into the market, such that prices fall to a level that is equivalent to or preferably less than the prices being paid by our international competitors for gas,” he said.
In eastern Australia, the current price of gas is between about $8 and $12 a gigajoule, compared with prices of about $7 in Asian markets. As a result, there are active proposals to open up to five new import terminals in Australia and buy in cheaper gas from overseas.
The two Centre Alliance senators don’t support this as a solution, arguing that the domestic supply exists to service Australian consumers but is dominated by a small group of big players.
“It’s my view that the gas market is not operating as a market should,” Patrick said. “[I believe] the gas companies have been maximising their returns from the Australian market. While the supply issue of two years ago has disappeared, price has not been addressed.”
Patrick and Griff argue the current situation is a real and present threat to the economy.
They are warning of increasing evidence that high gas prices in eastern Australia are putting the manufacturing sector under dangerous pressure and seeing small manufacturers close.
It’s an issue that the sector itself has been warning successive governments about for years. Some industry specialists warn that tying the domestic gas security mechanism to the export spot price to help out gas consumers is potentially risky because the price in other markets is volatile and, while it may be low now, it could rocket in future, taking the Australian price with it.
One of the peak manufacturing bodies, the Australian Industry Group, says the domestic gas security mechanism has had an impact but that in re-examining it and determining how to respond to the local price of gas, the government should also focus on three other possible moves. “Governments should support measures on both the supply and demand sides to moderate the pain through a looser gas market,” Ai Group chief executive Innes Willox told The Saturday Paper.
“These include building social licence for new gas production and import options by ensuring national and state environmental regulation are seen to firmly protect community interests; working with suppliers and users to ensure that additional supply does flow through to local users; and providing finance and information to ease demand-side efficiency and fuel switching, which can cut individual users’ costs and take pressure off the wider market.”
Willox said prices in the eastern Australian market were “increasingly challenging the viability of gas-intensive businesses, particularly in the chemical sector” and were pressuring electricity prices too. He warned domestic supply may be threatened again in 2023 as existing resources declined.
Ai Group also supports greater transparency in the market overall and eventually having a higher share of gas sold on open markets, not through confidential contracts.
The Australian Competition and Consumer Commission (ACCC) is examining the issue of gas pricing and produced an update on Thursday, recommending the publication of monthly liquefied natural gas prices for relevant production locations around Australia, plus the wholesale prices that domestic users are paying to producers and retailers – anonymised and aggregated – under future contracts of at least 12 months’ duration.
Another sector representative body, Manufacturing Australia, has also been pressing for action on gas prices.
MA chief executive Ben Eade told the annual Australian Energy Week conference in Melbourne on Thursday that Queensland had a model that other states could follow in relation to ensuring future supply for the domestic market.
“By unlocking new gas tenements specifically for use in domestic manufacturing, the Queensland government has provided a template for how gas should be developed in eastern Australia,” Eade said. “The lowest cost, lowest emissions, least disruptive way to solve east coast gas challenges is to develop new gas, close to customers, and make sure that gas goes to domestic customers.”
Eade told The Saturday Paper he hoped New South Wales and Victoria – the latter of which has a moratorium on conventional gas exploration in place until next year – would eventually replicate the Queensland move. “But until they do, we’re going to see mounting pressure for government intervention,” he said.
The manufacturing sector wants the government to consider the medium- and longer-term implications in any negotiations aimed at addressing the concerns Patrick and Griff have raised and to avoid expedient snap decision-making to secure votes on the tax concessions.
With Labor and the Greens only willing to countenance tax cuts for low-income earners and currently disinclined to support the government’s tax package as a whole – and with the government refusing to split the bill – the required senate support lies with Jacqui Lambie and either Centre Alliance or One Nation.
“We talk and engage with all non-government senators from all parties,” Finance Minister Mathias Cormann said this week. “We are of course not providing a running commentary on these discussions, but we are absolutely committed to deliver on the income tax relief for all working Australians as we promised we’d do at the election.”
Cormann is now trying to force Labor to either back the whole package or vote against it and explain to taxpayers why it doesn’t support giving them relief.
Pauline Hanson is understood to also be concerned about manufacturers, although her list of other demands in return for One Nation votes – including building a new high-efficiency, low-emissions coal-fired power station and the adoption of a proposal to divert rivers inland to irrigate Australia’s interior, known as the Bradfield Scheme – are not the subject of negotiations at this point.
She also wants a royal commission on the family law system.
Hanson and Malcolm Roberts were due to meet Treasury officials late this week to discuss the officials’ assessment of the economy.
But the nature of their demands has dealt them out of negotiations at this stage, leaving Patrick and Griff in the box seat. “Centre Alliance is engaging with Minister Cormann and the dialogue is constructive, without prejudice to the outcome,” Patrick told The Saturday Paper.
Patrick and Griff have already had talks with Treasury, in which they queried why energy costs and Australia’s current cost comparative disadvantage with international trading partners are not incorporated into official modelling. They have also met with ACCC chief Rod Sims and Reserve Bank governor Philip Lowe.
The ACCC has been increasingly focused on energy and particularly gas, how the sector operates and the impact on price. Lowe’s focus is on the economy more broadly and on measures to get money circulating and avoid a slowdown.
Having overseen the RBA board’s decision this week to lower the official cash rate to 1.25 per cent, Lowe has been urging the government publicly to use the fiscal policy levers at its disposal to provide some further stimulus.
There is concern that lowering the cash rate may not have the full stimulatory effect the economy needs, because while business may re-invest the savings in expansion and lower rates may spark more borrowing for investment, individual borrowers are more likely to opt for maintaining repayments at existing levels to reduce mortgages faster, rather than spending the extra.
Foreshadowing the possibility of the official cash rate being lowered further, to 1 per cent, Lowe said this week the two other options for supporting the economy rested with the government in the form of infrastructure spending and structural policies boosting employment.
“From my perspective, the best option is the third one – structural policies that support firms expanding, investing, innovating and employing people,” Lowe told a dinner in Sydney on Tuesday last week, a few hours after the rate cut had been announced.
“A strong dynamic business sector is the best way of creating jobs. Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards. So, as a country, it is important that we keep focused on this.”
The Morrison government is looking for affordable ways to invest in the economy that will fulfil that objective. It is also looking for a way to wedge Labor and its new leader, Anthony Albanese.
It’s not clear whether the kinds of moves Centre Alliance is proposing fit the RBA’s bill. But with another kind of bill front of mind at the moment – and a belief that those tax cuts do – the Coalition is certainly giving it some thought, no matter what the spin might suggest.
This article was first published in the print edition of The Saturday Paper on June 15, 2019 as "Detonating gas".
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