Interim authorisation for NSW vesting contracts

The Australian Competition and Consumer Commission has granted interim authorisation of the proposed Type 2 contracts which are part of the third tranche of vesting contracts* between New South Wales electricity generators and retailers.

In June 1998 the ACCC received an authorisation application in which it was asked to consider interim authorisation of the proposed contracts as the previously authorised second tranche contracts were due to expire. The proposed third tranche contracts contain two forms of contract: Type 1 contracts are two-way hedges contracts with an average strike price; Type 2 contracts incorporate price cap in the form of a one-way hedge and a floor price which operates as a binary option**.

On 24 June the ACCC granted interim authorisation to the Type 1 contracts. After market inquiries in NSW and Victoria the ACCC has decided to grant interim authorisation to the Type 2 contract until 31 October 1998. During the trial, the ACCC will continue public consultations on both contracts to assess their market effect and improvements needed to enhance indentified public benefits. The ACCC also extended its interim authorisation for Type 1 contracts until 31 October 1998.

Background

*Under transitional arrangements for the national electriicty market, vesting contracts are contracts established by State jurisdictions between their local generaors and retailers. They cover that portion of the electricity load which is still governed by regulated (rather than competitive) tariffs and local retail franchises. They are designed to provide a range of outcomes, including a progressive rate of exposure to competition, hedging protection for retailers against volatile spot prices and revenue stability for generators and retailers.

**The binary option in the Type 2 contract operates so that generators receive the full floor price plus the spot price, whenever the sport price is below the floor price. At spot prices at or above the floor, generators receive the spot price, but only up to the limit set by the one-way price cap in favour of retailers. When the spot price is at or above the price cap, retailers receive from generators the difference between the spot and strike prices.