The Australian Competition and Consumer Commission today issued its draft determination on the Type 1 and Type 2 vesting contracts struck between New South Wales electricity generators and retailers. The ACCC received the application for the contracts in June 1998 and undertook extensive market inquiries and analysis of the contracts, including a review by London Economics.
The draft determination proposes the ACCC authorise the vesting contracts, conditional upon several amendments being made. The conditions address the ACCC's concerns regarding the competition impact of the contract pricing arrangements, including the issues of stranded costs and cross-subsidies, and the proposed term of the vesting contracts.
The conditions apply to the two types of vesting contract and state that:
- The strike prices in the Type 1 contracts must be reduced from $44.50MWh to $37MWh, reflecting the cost of efficient new entry into generation.
- Any surplus revenue to retailers from this lower price should be recovered from the retailers by way of a levy or dividend.
- The binary option in the Type 2 contracts must not apply on Saturdays, Sundays and public holidays and can only operate in peak periods.
- The price caps in these contracts must match the new average strike price ($37MWh) in the Type 1 contracts.
- If the cross-subsidies created by the difference between low spot prices and the implied costs ($38MWh) in the franchise tariffs are not corrected by the binary floor, this effect must be corrected by a levy or dividend on the retailers.
- The term of the third tranche vesting contracts must cease by 31 December 2000, not by the end of February 2002.
The ACCC also extended its interim authorisation for the vesting contracts until 30 June 1999 to ensure that adequate time is given to the consideration of further submissions and consultations before issuing a final determination.