ACCC denies authorisation to proposed NSW electricity co-insurance arrangement

The Australian Competition and Consumer Commission today issued a determination denying authorisation to a NSW Government proposal that would require the State owned electricity Generators and the future acquirers of Gentrader bundles to enter into a joint risk management arrangement (co-insurance).

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.

Under the proposed co-insurance arrangement, 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 arrangements do not provide physical cover for lost generation capacity resulting from an outage and do not affect the level of electricity produced or dispatched by Generators or Gentraders.

"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," ACCC chairman Graeme Samuel said.

"There are a number of alternative risk management options available to the acquirers of the Gentrader bundles that can effectively and efficiently manage the financial risk that the co-insurance arrangement seeks to mitigate."

While the ACCC did not receive a large number of submissions about the arrangements most industry participants that did provide comments expressed the view that it would be more efficient for Gentraders to develop their own arrangements to manage this financial risk rather than be required to participate in a mandated co-insurance arrangement.

"More generally, the ACCC welcomes the broader reforms to the NSW electricity sector proposed in the NSW Governments proposed Energy Reform Strategy. These reforms should result in competitive benefits in the wholesale and retail supply of electricity in NSW."

The NSW Government has indicated that if the co-insurance arrangement is not authorised it may reduce the number of Gentrader portfolios offered, potentially from five to four, as a means of managing outage risk.

The manner in which the Energy Reform Strategy is implemented is a matter for the NSW Government. However, given the range of alternative risk management options available to Gentraders the ACCC considers that the Energy Reform Strategy could proceed, in its current form, without the co-insurance arrangement.

The ACCC's determination is available from the public register on ACCC website, www.accc.gov.au/AuthorisationsRegister and by following the links to this matter.