Carbon, mergers and other issues

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Annual Energy Users’ Association of Australia Conference, Melbourne
13 October 2014

With energy markets in Australia delivering significant challenges for all involved, Chairman Rod Sims provides an update on the ACCC's work on the carbon tax repeal and discusses merger process issues. He also provides some thoughts on the coming privatisation of the Queensland generation assets, and comments on the rapidly changing east coast gas market.

Transcript: 

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Introduction

Thank you for inviting me to speak today.

A quick scan of the papers on almost any day of the week reinforces what everyone in this room knows from real experience. Energy markets in Australia are delivering significant challenges for all involved; producers, network businesses, investors, policy makers and, especially, for users.

High and rising prices, which are in part driving declining demand, generation oversupply, network ‘death spirals’, and disruptive technologies are concepts with increasing profiles. A lot of work is being done in a range of quarters to try and understand their implications for our energy markets.

Late last month, the Harper Review Panel released its draft report on Competition Policy. This may seem a pretty clumsy segue on my part, from death spirals and disruptive technology to the Harper Review, but there is an important connection.

Effective competition policy allows markets to be adaptive, innovative and meet the requirements of consumers. Competition policy also supports flexible regulatory arrangements that can adapt to changing market conditions and to new goods and services that emerge with rapidly evolving technology.

Effective competition policy, therefore, is an important tool for meeting many of the challenges described above.

Effective competition policy is about two things:

  • first, opening as many sectors as possible up to the disciplines of competition and other market signals; and
  • second, getting the settings of the competition law right, so that the playing field is as level as possible.

I am delighted that Professor Harper and the panel focussed on both matters in their draft report.

The ACCC particularly appreciates their detailed consideration of microeconomic reform issues. While we often hear that all the low hanging fruit has been picked, and that all the really important reforms have been made, we disagree.

The Harper Panel’s draft report identifies a considerable amount of microeconomic reform. It may be that the biggest challenge for governments, both state and Commonwealth, will be deciding on which ones to expend the political effort. While that will be a matter for them, I would offer one observation.

In a number of markets, the natural dynamics, technological change and commercial innovation might be making existing legislative or regulatory constraints of less relevance, even without overt reform. In such cases, all governments may need to do is make sure they don’t stand in the way of the emerging technologies and innovative firms who are delivering the goods and services that consumers are making clear they value.

This may be particularly the case in the energy sector. The challenge for policy makers and stakeholders is not to resort to restrictive frameworks that protect encumbents or, particularly, ‘pick winners’.

The ACCC has been involved in a number of issues recently that go to consumer confidence and competitive energy markets.

Today I will cover four topics:

  • Frist, our work on carbon
  • Second, some important merger process issues
  • Third, some thoughts on the coming privatisation of the Queensland generation assets, and
  • Fourth, some comments on our rapidly changing east coast gas market.

Carbon

As I am sure you all know the ACCC has been given new enforcement, price monitoring and information gathering powers to ensure that all cost savings from the carbon tax repeal are passed on. These were naturally focussed on energy as the sector most effected.

The ACCC has had a price monitoring function since February this year, originally established under a Direction from the Treasurer. This role is now provided for in the new amendments to the Competition and Consumer Act 2010 (the CCA).

The new legislative provisions saw the ACCC issue over 250 carbon tax removal substantiation notices to certain electricity, natural gas and synthetic greenhouse gas businesses. These businesses were required to respond explaining how the carbon tax repeal affects input costs and prices for their goods.

They were also required to provide a carbon tax removal substantiation statement to the ACCC and publish this statement on their website.

Electricity retailers and producers and natural gas retailers were also required to provide to their customers a statement that identifies their costs savings from the repeal to each class of customer.

Compliance with the substantiation requirements has been high; we even received more substantiation statements than expected. This shows that businesses supplying regulated goods are taking the ACCC’s role and powers seriously, and are conscious of doing the right thing.

Many of you will have seen your energy suppliers’ substantiation statements on their websites, and by now those of you that are a customer of an energy retailer should have received a customer statement from them, either individually or as a commercial customer.

If you have not received this customer statement and you believe you should have, I encourage you to contact the ACCC.

The ACCC is continuing to analyse the information provided in the substantiation statements and notice responses and will report on its activities in the next quarterly report to the Minister, which is due by 28 October.

The new legislation requires businesses that supply electricity, natural gas or synthetic greenhouse gases to pass on all cost savings attributable to the repeal of the carbon tax. Heavy penalties apply for those that engage in price exploitation.

All of you will be in a commercial and industrial contract for the supply of electricity, the terms of which may be vastly different depending on your level of consumption. For example on the preliminary data we have received from the major retailers (AGL, Energy Australia and Origin) expected annual cost savings for SME’s range from:

QLD

NSW

ACT

VIC

SA

8.5% - 9.1%

7% - 8.3%

9.3% - 9.5%

7.4% - 9.7%

5.2% - 6.3%

These represent significant savings which, as I have said, we are still assessing. For larger users, likely all of you, however, the savings will be larger as your network costs are a smaller part of your energy bill. In some cases the savings could be a multiple of those shown.

Some of these contracts are carbon inclusive, some are carbon exclusive. No doubt many of you negotiated heavily before entering into these contracts, and some of you may have gained a competitive advantage by entering into a contract that is carbon inclusive; indeed many clean contracts provided for the likelihood of repeal in their price.

It is not the Government’s intention for the price exploitation provisions to override pre-existing contracts so we expect to see the repeal already factored into clean contracts. If you believe, however, that you have been misled into entering a carbon inclusive contract I encourage you to lodge a complaint.

The ACCC had an enforcement role on the way in and now it has a separate enforcement role to deal with the repeal. So our motto is: what went on should now come off!

If a business, any business, passed through a carbon component in its prices during the carbon tax period, then the ACCC expects it to now pass back the cost savings from the repeal.

We expect that the people in this room, and the wider EUAA membership, can play an important role here. If your provider, or any supplier to you, indicated a specific price increase due to the imposition of the carbon tax on the way in then check that your prices are now going down by a like amount with the removal of the tax.

If this does not happen, please inform the ACCC.

Businesses also have an obligation not to make misleading representations in relation to the repeal.

We recently instituted court proceedings against synthetic greenhouse gas supplier Actrol Parts Pty Ltd for false or misleading representations including about the effect of the carbon tax on the way in.

Mergers

As mentioned, I will discuss some merger process issues, and some thoughts on the coming Queensland privatisations.

Merger process issues

The AGL-Macquarie Generation Tribunal decision is the first time the Australian Competition Tribunal has had to consider a merger authorisation as the first instance decision maker. The ACCC was disappointed with the Tribunal’s decision. However, I want to briefly discuss the process.

When a merger authorisation is heard by the Tribunal it is a litigious process. This differs from the ACCC considering a matter under the informal merger review process.

The nature of this process is that the Tribunal relies on evidence put forward by parties in the matter. This means that the decisions of the Tribunal are only as good as the evidence that is put before it.

This is why industry witnesses play a critical role in informing the Tribunal’s decision making process. Without industry participants who are willing to give detailed evidence the decision making process will be compromised and therefore may not lead to the right result.

In the AGL-Macquarie Generation matter some important potential witnesses were reluctant to provide evidence. Many feared their future commercial relationship with either the New South Wales Government or AGL would be affected.

This is, I suppose, understandable, but it does have a significant impact on the ability of the Commission to put the appropriate information before the Tribunal.

So if you have concerns with an acquisition in future, I would encourage you to approach the ACCC, not only to provide your views but, if the matter is going before the Tribunal, also to make an offer to provide detailed admissible evidence to support your views.

Queensland privatisation

These comments segue into some comments on the ACCC’s next involvement in energy mergers which, after the sale of Delta, will probably be triggered by the privatisation of the Queensland electricity assets. The focus for us clearly will be on the generation assets rather than the networks.

As I’ve said before in previous speeches, good economic outcomes can be achieved when governments take a long term view of the benefits of privatisation; that is, by focussing on economic efficiency.

On the flip side, there is the potential that selling an asset may worsen or entrench a market structure that is not sufficiently competitive, and so damage competition, consumers and the long term health of the economy.

The Queensland Government has signalled an intention to privatise Stanwell and CS Energy. The Queensland generation sector is the most highly concentrated in Australia, other than Tasmania, with two generators accounting for 65 per cent of output, and the two biggest retailers servicing 84 per cent of small residential customers once Ergon is excluded.

Breaking up Stanwell and CS Energy for privatisation into, say, 3 competitors, as existed a short time ago, would clearly improve competitive outcomes and make ACCC approval a smoother path, as it would allow a competitive generation market.

But the identity of the buyers will also be critical.

If non-big-3 players purchase some of the generation assets, or some assets were listed via an IPO, it would support a more competitive generation sector. Importantly, it would also support a more competitive retail sector, because the independent generator would have an incentive to grow in retail and support the growth of smaller retailers.

The ACCC hopes that the Queensland government will use this opportunity to establish a competitive structure when privatising its generation assets. Selling the assets in a way that promotes competition will clearly result in the best outcome for Queensland electricity consumers in the long term.

One new element in the competitive dynamics of the market is the growing role of Snowy Hydro. At some stage it would help to privatise Snowy Hydro, and clearly it should not be sold to any of Origin, Energy Australia, or AGL. With privatisation it would have the capital to be an even more vigorous competitor with the big-3.

Gas

A key issue for the energy sector, and I’m sure for many of you in the room, concerns the rapid changes to the eastern gas market and the impacts of these changes on gas users.

While the western and northern gas markets have been exporting for some time, the eastern gas market is transforming, from a purely domestic market to one that is preparing to export LNG. While this is a major development for the Australian economy more generally, the development of LNG export capacity is exerting significant pressure on the domestic gas market.

As gas supply begins to meet both domestic and international demand, domestic prices naturally will start to be linked to the higher international prices. Some even fear that Australia’s gas prices may exceed export parity prices for a time.

Picking up on the theme of effective competition policy that I explored earlier, it is important that we not seek a ‘quick fix’ that distorts the competitive operation of gas markets. Forms of gas reservation, for example, distort market signals, and the development of new gas supply.

Rather, efforts should be directed towards addressing inefficiencies in our gas market so that competition can deliver better outcomes for gas users.

The recently released Energy Green Paper outlined a number of approaches which are directed at dealing with existing market problems.

The Green Paper, for example, called for greater availability and quality of gas market information. The nature of gas market bilateral trading means there is limited capacity, supply and price information available for consumers, or anyone for that matter, to understand what is going on in the market.

The Green Paper noted that an ACCC Price Inquiry into the eastern Australian wholesale gas market, under Part VIIA of the Competition and Consumer Act, or a Productivity Commission review, could examine the levels of competition in the eastern gas market.

Any such inquiry could inform consumers and others about future market conditions and opportunities to increase competition in the upstream market, including opportunities to remove unnecessary regulation, and issues that may limit wholesale market competition.

Conclusion

To conclude, there are many challenges facing the energy sector, and much happening

It will be interesting times ahead.

Thank you for your time today.

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