ACCC to closely monitor NSW government 'trader proposal'

11 November 2004

The Australian Competition and Consumer Commission will closely monitor the proposed NSW electricity trader arrangements and oppose any arrangement likely to substantially lessen electricity market competition.

ACCC Commissioner, Mr Ed Willett, said today the ACCC is aware that the NSW Government is consulting widely on a "trader proposal".

Under the proposal, NSW would tender out three trader contracts to be linked to the capacity of the three existing generation companies (Macquarie Generation, Delta Electricity, and Eraring Energy).

"A private sector trader would then determine how much capacity of each State-owned generator is traded in the NEM [National Electricity Market].

"Retail trading arrangements would differ according to whether the customer was supplied under regulated or negotiated contracts arrangements. The State owned retailers would continue to provide retail services to small retail customers on regulated, standard form contracts. The Electricity Tariff Equalisation Fund would be retained for this group of small retail customers (currently the majority of small customers for now).

"Responsibility for servicing and supplying customers on negotiated retail contracts (mostly large users at this stage) would transfer from the government owned retailer to a private retail manager. This would involve the appointment of four retail managers to manage the negotiated retail customer accounts of the NSW Government owned retailers, under a model called the Agency Contract model.

"The trader proposal presents an opportunity for structural reform in New South Wales where ownership of generating capacity is concentrated among a few large companies (comprising more than 95 % of total generation capacity, all government owned). Structural reform can be achieved either by disaggregating the existing owners, or by ensuring that the trading contracts, particularly for generators, are allocated to new market entrants.

"The trader proposal could also improve the competitiveness of the underlying market structure. In NSW the generation companies currently operate as ‘portfolio companies’, meaning that each company owns a number of generating units.

"As [the] Parer [Review] noted, this structure may strengthen the ability to exercise market power, particularly if the portfolio consists of a mix of baseload and peaking plant.

"The NSW government has said that although it would tender out three trader contracts linked to the capacity of the three existing generation companies, the proposal is sufficiently flexible to allow for more than three contracts, such as for specific power stations.

"The allocation of the trading contracts to more than three generation traders would further enhance the competitiveness of the market structure in NSW.

"It is possible that some bidders for the trading contracts will seek to combine generation and retail activities. The ACCC recognises that in some cases, vertical integration can be advantageous, provided that there is effective competition at the horizontal level. For example, a vertically integrated generator-retailer may not raise significant competition concerns if there is effective competition in the separate retail and generation markets. Therefore, competition is likely to be enhanced in NSW if the trading contracts are allocated amongst individual, competing traders.

"Parer specifically recommended that the NSW Government should further disaggregate its generation assets, and abolish the Electricity Tariff Equalisation Fund. This would enhance the success of the NSW government’s proposal in achieving efficient, competitive market outcomes. However the NSW Government has decided to retain ETEF for the suppliers of small, regulated retail customers.

"Overall, the trader arrangements should be welcomed: in many respects, they offer the opportunity to improve the effectiveness of, and competition in, electricity markets, including by diversifying participation in these markets.

"However, it is also possible, on particular scenarios, that implementation of the arrangements will increase competitive risks. The ACCC will take a strong interest in the implementation of the proposed NSW trader arrangements, and will oppose any arrangements that are likely to substantially lessen electricity market competition. Acquisitions by large existing generators and/or retailers and vertically integrated acquisitions are more likely to raise competition concerns. In particular, the trader arrangements in generation currently proposed, retaining the three portfolio generation interests, may limit the field of available potential acquirers".

A copy of the speech, to the National Energy Market Lawyers Forum in Sydney, will be available on the ACCC website.

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Release number: 
MR 251/04
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