Background As part of its attempts to reduce electricity prices for consumers, the Federal Government has drafted legislation to prohibit three types of conduct by electricity businesses:
1) Failure of electricity retailers to pass-on reductions in supply chain costs to residential and small
business customers through lower retail tariffs.
2) Failure of electricity generators to offer, or to offer on reasonable terms, financial contracts to
potential counterparties for the purpose of substantially lessening competition in any electricity market.
3) Electricity businesses bid or fail to bid in the electricity spot market in a way that is fraudulent,
dishonest or in bad faith and/or for the purpose of distorting or manipulating prices in the spot market.
PROPOSED PROHIBITIONS Relevant instruments and provisions As noted above, the Federal Government has drafted legislation to prohibit three broad types of conduct in the Australian electricity industry (the Amendment Bill) The changes involve the insertion of a new Part XICA in the Competition and Consumer Act 2010 (CCA), immediately following Part XIC on the telecom access regime.
Retail pricing prohibition
Apparent objective The Explanatory Memorandum defines a retailer’s ‘underlying cost of procuring energy’ as referring to elements of the retailer’s ‘cost stack’, which includes wholesale (spot and/or contract) costs, network charges and environmental cost.4 Retail costs and margins are not considered part of the underlying cost of supplying electricity, so efficiencies or reductions in those costs do not need to be passed-on. For vertically-integrated generator-retailers (‘gentailers’), wholesale energy costs may refer to ‘opportunity costs’ (such as the price that the wholesale energy could have achieved in the contract market) rather than the internal transfer prices adopted by the business (which may be different). Regarding the magnitude and duration of underlying cost reductions that are to be regarded as
‘sustained and substantial’, this will depend in part on the characteristics of the contract the customer is
on, as well as all surrounding circumstances. However, the Explanatory Memorandum states that, “[a]
change in underlying costs that lasted a week or a month would be unlikely to be considered sustained.”
The Explanatory Memorandum also indicates that a 20 percent fall in wholesale energy costs would be
regarded as sufficiently substantial to warrant being passed-through to customers. Finally, the timing of
tariff reductions also needs to be reasonable having regard to the circumstances.
LIKELY EFFECTS This section discusses the likely effects of the draft legislation in relation to each of the three proposed prohibitions. In each case, the precise conduct that would contravene the prohibition is unclear as the prohibitions are expressed in qualitative terms and have not (yet) been interpreted by either the ACCC or a court. Further, as explained in section 2, the Explanatory Memorandum provides very limited – and-in some cases confusing – guidance as to the way in which the prohibitions are intended to be interpreted. This means that businesses will need to devote substantial managerial attention to second-guessing how the ACCC, Treasurer of the day and courts are likely to interpret a particular prohibition. At least with respect to the ACCC, businesses can look to the recent Retail Electricity Pricing Inquiry (REPI) report for some indication as to how the ACCC views electricity market competition; although a complicating factor is whether the ACCC may take a more interventionist stance after having been given the new responsibilities proposed under the draft legislation. In any case, anticipating how governments and courts will react to certain behaviours is an even more difficult exercise than anticipating how the ACCC could respond. In general, risk-averse businesses – who are even more likely in the current political climate to be concerned about adverse publicity – are likely to interpret the prohibitions widely, leading to perverse incentives and outcomes.
PLACE WITHIN THE BROADER CONTEXT In our view, the proposed prohibitions will only add to the uncertain and frequently hostile environment facing investors in energy infrastructure in Australia today. It is often forgotten that investors are not an alien species, but simply agents – like the rest of us in our economic lives – who are driven to respond to the financial incentives created by government policies (or vacuums) and the political incentives fomented by government rhetoric. In this sense, the behaviour of investors effectively holds a mirror up to governments, reflecting back an unbiased picture of their policy-making successes and failures. When the jurisdictions embarked on energy reforms under the auspices of national competition policy in the 1990s, they shared an understanding that while governments would be responsible for devising key policy settings and regulating monopoly infrastructure, asset operation and investment decisions would be left to businesses and consumers as they are in other sectors. This led to a successful transition from an historical electricity generation mix skewed towards coal-fired baseload capacity towards a mix of plant fuels and technologies better-suited to our ‘peakier’ 21st century requirements. Whenever government policies changed, the market responded as logic would suggest. For example, when state governments reacted to distribution network outages by boosting reliability standards and regulatory rates of return in the mid-2000s, investors poured resources into upgrading poles and wires. When the Commonwealth and State governments offered irresistible subsidies for installing solar panels and windfarms, households and businesses delivered uptakes at a pace few predicted. When consumers and taxpayers began paying the price for these activist policies and governments backtracked, investors again quickly obliged by rapidly putting the brake on spending.