Consumers would play a key role in the efficiency of the National Electricity Market [NEM] if they were able to receive and react to price signals through incentives such as being able identify and buy lower-priced off-peak electricity, Australian Competition and Consumer Commissioner , Mr Ed Willett, said today.*
"Efficient investment in infrastructure is vital, but it is equally important that prices in the NEM are established … so as to ensure that electricity consumers can contribute to the overall efficiency of the NEM", Mr Willett said.
"In short, consumers will only be able to contribute if they are able to receive and act on price signals".
The issue was recognised by governments and industry recently and gained more prominence with the Ministerial Council on Energy's response to some recommendations of the 2002 Parer Review.
Parer noted that most consumers had limited ability to respond to price signals from the wholesale market because time-of-use meters were generally only used by larger industrial customers. Residential customers representing around 40-50 per cent of NEM load, were effectively excluded from accessing products that could encourage load reduction at peak times.
"Similarly, Parer observed that even in jurisdictions that have implemented full retail competition the existence of price controls on such a significant proportion of load in the NEM restricts the ability of retailers to offer products that will provide financial incentives to reduce consumption when wholesale prices are high. The potential for retail price caps to stifle investment in electricity supply in the long run was also highlighted.
"The ACCC recognises the opportunities presented by interval meters in creating more innovative and responsive retail markets. To encourage their effective participation … it is important that consumers are able to respond as electricity prices vary throughout the day. Whether this is market driven, or facilitated by a regulatory rollout of interval meters … it is imperative that regulatory frameworks give retailers the opportunities to develop innovative tariff solutions so that consumers have incentives to reduce and shift load.
"This encourages innovative retailers to seek to gain a competitive edge by developing offerings that reward consumers who reduce their consumption in peak periods, thus creating a much more efficient electricity market.
"But although sophisticated metering is a key factor in facilitating user participation, establishing a regulatory framework that promotes efficient supply is crucial for ensuring that consumers receive the benefits of a competitive retail market in the long run.
"Further, the ACCC believes that moves to promote new entry in retail and generation markets are welcome, particularly in the current climate of increasing aggregation of generators, and vertical integration between generators and retailers.
"Although merger proposals involving vertical integration have the potential to create competition issues, effective competition in the separate functional areas of retail and generation can mitigate any such concerns. This is a view that the ACCC has emphasised in several recent submissions, including the Productivity Commission's review of National Competition Policy, and the Victorian Government's review of energy cross-ownership rules. These considerations were also highlighted earlier this year in the ACCC's assessment of China Light & Power's acquisition of SPI's contestable assets in Victoria".
Mr Willett also commented that there was "no doubt" that ACCC regulation of the energy area had been "good for the industry and good for investors".
"Since 1996, the Utilities Accumulation Index has generated a compound annual return of 17.4 per cent, well in excess of the compound annual return of the ASX200 Accumulation Index of 11.1 per cent. While the Utilities Accumulation Index is concentrated, the Commission considers this relevant evidence that healthy returns in regulated industries are available.
"Ratings agencies have been just as positive about the prospects of regulated companies over the next three to five years. Moody's noted 'the supportive regulatory frameworks and stable operating and financial profiles' while Standard and Poor's noted the 'supportive and transparent regulatory regimes'. Similarly, Fitch Ratings stated 'the current regulatory regime appears relatively supportive for transmission entities'.
"The Allen Consulting Group (ACG) has also prepared a report that reviews the adequacy of the returns of regulated Australian utilities. ACG concluded that 'the Australian regulatory framework is providing adequate scope for companies to earn appropriate returns in the energy infrastructure industry".
Closing, Mr Willett said the ACCC welcomed the recent Global Competition Review report on competition agencies in which the ACCC was "said to understand competition in energy markets particularly well. Several sources identified this as an area in which it 'leads the international field'.
* Mr Willett was speaking at the Australian Energy and Utility Summit in Sydney.