The Australian Competition and Consumer Commission has issued its final determination for authorisation of electricity vesting contracts in South Australia.
The final determination authorises the contracts subject to the following two conditions:
1. The average price outcome (based on the estimated value of the contract prices, pool prices and capacity payments) for the acquisition of electricity for franchise and grace period customers should be $40MWh or below from 1 February 2000 for the remaining life of the vesting contracts.
2. From 1 January 2001, ETSA Power (the franchise retailer) must have the option of terminating its swap and price cap contracts. ETSA Power must give a month's notice of its decision to exercise its option. To the extent applicable, the counter-party generators must have an option to re-negotiate any affected contracts and/or terminate any related insurance contracts, should ETSA Power exercise its option.
The contracts have been authorised until December 2002, subject to being terminated earlier by virtue of ETSA Power exercising its option.
The final determination follows a draft decision issued in October 1999 and a pre-determination conference in late November 1999.
"The ACCC's determination revisits the issues of contract prices and design as well as the duration of the contracts in light of strong concerns raised at the pre-determination conference and in further submissions by both SA customers and national user groups, ACCC Chairman, Professor Allan Fels, said.
"The ACCC welcomes the South Australian Treasury estimate that contract prices will achieve $40MWh or below over the remaining period of the contracts. The ACCC considered that this price outcome should be explicitly stated as a condition of approval, consistent with efficient new entry prices and with the ACCC's earlier decisions on vesting contracts in NSW and Queensland.
"On balance, the ACCC considers that this price level will reduce the risks faced by ETSA Power and support the tariffs currently paid by franchise and grace period customers it supplies".
Professor Fels acknowledged that the determination differs from the earlier decision on NSW vesting contracts, in accepting 31 December 2002 as the end date for the contracts.
"However, we have inserted a new condition which gives ETSA Power the option, from January 2001, of terminating the contracts sooner, at a time when the entry of new capacity into the SA electricity industry may provide a better deal for franchise electricity."
"The ACCC examined this issue closely and weighed up straight termination sometime during 2000-2001, against giving ETSA Power the option to end the contracts from 2001 onwards," Professor Fels said.
"In the end, we considered that giving ETSA Power an option meant the business could make a commercial decision at the appropriate time in the light of up-to-date information about demand growth and the introduction of new capacity or interconnection.
"On the generators' side, we have included an option to re-negotiate the contracts or, alternatively, cancel their insurance arrangements where applicable, in response to ETSA Power exercising its option."
Professor Fels said the ACCC would be vigilant of the behaviour of both ETSA Power and the generators during and after the transitional vesting period, in the light of ongoing concerns about price spikes, the tight supply/demand balance and the issue of market power.
"South Australia is a market that can only benefit from investment in new generation, inter-connection and demand side initiatives which alleviate the supply/demand problems and introduce further competition. The ACCC will take a serious view of any attempt by the incumbent electricity businesses to thwart the plans of new entrants at the wholesale or retail level," he said.
The final determination authorises the contracts subject to the following two conditions:
1. The average price outcome (based on the estimated value of the contract prices, pool prices and capacity payments) for the acquisition of electricity for franchise and grace period customers should be $40MWh or below from 1 February 2000 for the remaining life of the vesting contracts.
2. From 1 January 2001, ETSA Power (the franchise retailer) must have the option of terminating its swap and price cap contracts. ETSA Power must give a month's notice of its decision to exercise its option. To the extent applicable, the counter-party generators must have an option to re-negotiate any affected contracts and/or terminate any related insurance contracts, should ETSA Power exercise its option.
The contracts have been authorised until December 2002, subject to being terminated earlier by virtue of ETSA Power exercising its option.
The final determination follows a draft decision issued in October 1999 and a pre-determination conference in late November 1999.
"The ACCC's determination revisits the issues of contract prices and design as well as the duration of the contracts in light of strong concerns raised at the pre-determination conference and in further submissions by both SA customers and national user groups, ACCC Chairman, Professor Allan Fels, said.
"The ACCC welcomes the South Australian Treasury estimate that contract prices will achieve $40MWh or below over the remaining period of the contracts. The ACCC considered that this price outcome should be explicitly stated as a condition of approval, consistent with efficient new entry prices and with the ACCC's earlier decisions on vesting contracts in NSW and Queensland.
"On balance, the ACCC considers that this price level will reduce the risks faced by ETSA Power and support the tariffs currently paid by franchise and grace period customers it supplies".
Professor Fels acknowledged that the determination differs from the earlier decision on NSW vesting contracts, in accepting 31 December 2002 as the end date for the contracts.
"However, we have inserted a new condition which gives ETSA Power the option, from January 2001, of terminating the contracts sooner, at a time when the entry of new capacity into the SA electricity industry may provide a better deal for franchise electricity."
"The ACCC examined this issue closely and weighed up straight termination sometime during 2000-2001, against giving ETSA Power the option to end the contracts from 2001 onwards," Professor Fels said.
"In the end, we considered that giving ETSA Power an option meant the business could make a commercial decision at the appropriate time in the light of up-to-date information about demand growth and the introduction of new capacity or interconnection.
"On the generators' side, we have included an option to re-negotiate the contracts or, alternatively, cancel their insurance arrangements where applicable, in response to ETSA Power exercising its option."
Professor Fels said the ACCC would be vigilant of the behaviour of both ETSA Power and the generators during and after the transitional vesting period, in the light of ongoing concerns about price spikes, the tight supply/demand balance and the issue of market power.
"South Australia is a market that can only benefit from investment in new generation, inter-connection and demand side initiatives which alleviate the supply/demand problems and introduce further competition. The ACCC will take a serious view of any attempt by the incumbent electricity businesses to thwart the plans of new entrants at the wholesale or retail level," he said.