The Australian Competition and Consumer Commission has issued its decision on interim authorisation of the proposed third tranche of vesting contracts* between New South Wales electricity generators and retailers.
On Thursday 11 June 1998, the ACCC received an application for authorisation, in which it was asked to consider interim authorisation of the proposed contracts in view of the imminent expiry of the current second tranche contracts, authorised in January 1997.
The proposed third tranche contracts contain two forms of contract: Type 1 contracts which are two-way hedge contracts with an average strike price; and Type 2 contracts which incorporate a price cap in the form of a one-way hedge and a floor price which operates as a binary option.**
In the limited time available before the planned commencement of the new vesting contracts on 1 July 1998, the ACCC decided, to grant interim authorisation to the proposed Type 1 contracts. It will announce its decision on interim authorisation of the Type 2 contracts in the near future. The interim authorisation for the Type 1 contracts will continue until 30 September 1998, while the ACCC carries out its statutory public consultation and determinations on the proposed arrangements.
The ACCC consultations will consider both the Type 1 and Type 2 contracts. For further information about this media release: Professor Allan Fels, Chairman, (03) 9290 1812 Ms Lin Enright, Director, Public Relations, (02) 6243 1108 Mr Paul Hutchison, Electricity (02) 6243 1250 MR 125/98 * Under transitional arrangements for the national electricity market, vesting contracts are contracts established by State jurisdictions between their local generators and retailers.
They cover that portion of the electricity load which is still governed by regulated (rather than competitive) tariffs. 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 contracts operates so that generators receive the full floor price plus the spot price, whenever the spot 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.