In rejecting the AGL case for acquiring a 35 per cent share of the giant Loy Yang generator, the ACCC is seeking to structure the electricity industry in the image it favours. The ACCC has strongly signalled that it would not agree to a retailer acquiring a major base-load generator, although it has seen retailers take equity in smaller peaking generators.
On the face of it, knocking back this merger because of fears about it bringing monopolistic exploitation is odd. While AGL is a large electricity retailer in Victoria and South Australia, it has little presence in NSW and Queensland. As an electricity generator, AGL has only one percent of the south east Australia output. Even a full acquisition of Loy Yang would leave it with only six percent of capacity (but 10 per cent of output).
The ACCC claims that the relevant market is Victoria where Loy Yang comprises over 20 per cent of capacity. It argues that while power flows freely between Victoria, NSW and South Australia 99.9 per cent of the time, the risk of a transmission outage places limits on inter-state contracting. There may be something in this though considerable contracting does in fact take place (in one notorious contract with Powercor, NSW state owned generator Eraring has lost hundreds of millions).
Nor is it a precedent for generators and retailers to be playing in each other's turf. Victorian generator Yallourn Energy has developed one of the country's largest retail arms, specialising in very large, low margin, customers. Both Origin and TXU as retailers own significant generation, while the major interstate government owned retailers have also sought to acquire generation capacity.
One of the major developments in energy markets since the disaggregation and privatisation/ corporatisation in the mid 1990s has been a drive from the retail arm to avoid risks. Exposure to risk can leave retailers paying $10,000 to supply $40 worth of electricity. A spot price is one essential feature of competitive energy markets, but over 90 per cent of electricity is purchased on longer term contracts; the spot market essentially performs the role of balancing "under and overs" in contracting.
The ACCC is trying to ensure transactions are overwhelmingly in the form of contracts between generators and unaffiliated retailers. This is to ensure a liquid contracts market so that new players can enter. California attempted to force all electricity transactions on an arms length day-to-day spot market basis. The ACCC recognises the disastrous effects of the Californian approach but many would see its market engineering approach also posing risks.
Even if generators and retailer affiliations were to do all their contracting in-house, the ACCC is arrogating itself to the position of determining how the market should develop. This aside, contracting would not be confined to in-house affairs. Retailers are taking equity in generators because of a very strong risk-aversion. No retail manager would agree to place all, or the great bulk, of his supply eggs in the one basket. The contract market will continue to operate even if a Loy Yang/ AGL triggered an Origin/ Hazelwood combination.
It also should be recognised that AGL would only be a minority shareholder in Loy Yang. As such it would not have control. Nor would the other shareholders allow AGL-appointed directors information that might benefit AGL, since to do so would impact adversely on their own investment. Undertakings by AGL to the ACCC in this regard would be nothing more than a recognition of normal business practice.
In protesting against the ACCC's actions, Minister Theophanous suggests this vindicates his position in opposing the Commonwealth model of having energy regulation controlled by the ACCC. Irrespective of the merits of where energy regulation is best placed, the ACCC's decision was taken on anti-monopoly grounds, and it would retain that function irrespective of the location of a "single" energy regulator.
One thing about which Minister Theophanous is correct in saying is that blocking the sale of the Loy Yang to Australian based companies who already hold an interest in the National Electricity Market must harm investment prospects in the industry.
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