In a draft decision the Australian Competition and Consumer Commission is proposing to deny authorisation to the NSW Government-owned electricity generators and the future acquirers of the Gentrader bundles to join and use a joint risk management arrangement.
As a part of its Energy Reform Strategy NSW proposes to disaggregate its three electricity portfolios into five Gentrader bundles using a bidding process that is expected to be finalised at the end of 2010.
The Gentrader model is designed to allow the ownership of the power stations to be retained by the Government and the contractual rights to trade the electricity produced to be held by privately owned Gentraders.
Each Gentrader has the right to trade the electricity into the wholesale market that is produced by the group of generating assets to which it is attached.
Aggregating generating assets into larger bundles assists in managing risk exposure caused by an outage of any power station within the bundle. This co insurance arrangement is intended to retain some of the risk management benefits resulting from having a larger portfolio of generating assets, while allowing the trading rights of electricity generated by these stations to be sold in disaggregated bundles.
If there is an outage at one of the generating assets, which causes the level of electricity being produced to fall below a predetermined level to be set under the co-insurance arrangement, the Gentraders will be required to provide each other with financial compensation.
"The ACCC recognises that the NSW Government's proposed Energy Reform Strategy should result in competitive benefits in the wholesale and retail supply of electricity in NSW.
"However, the ACCC is not satisfied that the co-insurance arrangement is necessary for the reforms to be implemented or for the benefits of the reforms to be realised," ACCC chairman Graeme Samuel said.
"There are a number of alternative risk management options other than co-insurance available to the acquirers of the Gentrader bundles that efficiently and effectively manage this risk."
The mix of generating assets in some of the Gentrader bundles means that they can be used as cover for each other in the event of an outage. Similarly, some purchasers of the Gentrader bundles may have other generating assets in NSW that can also be used as cover.
There also exist a range financially based products such as arrangements with fast start peaking power stations, traded derivatives or where available, insurance products. Risk mitigation measures could also be built into contracts with electricity purchasers and in the medium term, building more standby generation may be an option for some Gentraders.
"Given this, the ACCC does not consider that there is a case for the Gentraders to be required to take part in a co-insurance arrangement that they may not want or need."
The ACCC believes that the co-insurance arrangement will only result in, at best, some short term marginal public benefit by assisting new entrant Gentraders manage risk.
The ACCC considers that the co-insurance arrangement is likely to result in some public detriment through inefficiently altering the contracting behaviour of the Gentraders and in some cases foreclosing alternative providers of risk mitigation products or services from supplying the Gentraders.
The ACCC does not consider that a decision to deny authorisation to the co insurance arrangement should affect the NSW Government's ability to proceed with the Energy Reform Strategy and in particular, the Gentrader arrangements.
The ACCC invites submissions on its proposed decision, prior it makes a final decision in the coming months. Further information about making a submission and the ACCC's draft determination will be available from the ACCC website, www.accc.gov.au/AuthorisationsRegister.
In the mid 1990s the ACCC authorised collective arrangements between Victorian electricity generators and retailers to manage the risk of high spot prices for electricity. However, these arrangements were developed in the context of what was, at the time, an immature and evolving market. Further, unlike the proposed NSW co-insurance arrangement, the Victorian arrangements were developed by the industry and were voluntary. Authorisation for these arrangements expired in 2001 and the parties did not seek to extend them.
Authorisation provides immunity from court action for conduct that might otherwise raise concerns under the competition provisions of the Trade Practices Act 1974. Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit from the conduct outweighs any public detriment.