Regulation, Industry Structure & Market Power The Way Forward - - PowerPoint PPT Presentation

Regulation, Industry Structure & Market Power – The Way Forward for Energy Users

Roman Domanski Executive Director Energy Users Association of Australia

ACCC Conference, Gold Coast, 1 August 2003

Where Are We (Users) Coming From …

• Energy reform … what is it good for?

– Absolutely nothing!

• Well not quite, because there have been benefits

– But they

• Have varied over time (in the energy market)
• Been limited geographically
• Are constantly under threat from market power and

monopolies

• We need market structures and regulation to

deliver benefits to users

– We aren’t getting enough of this yet

Why Did We Reform Energy?

• Supposedly to benefit energy users

– That’s what we were told at the time and was the foundation for user support – We’ve had a bit of this but not enough

• Reality is that the reforms have conferred far too

few benefits on users

– Businesses sold off at inflated prices to increase returns to pre-existing ‘owners’ – Government owners have manipulated businesses, regulators and policy for budgetary purposes – Well-known con trick – Buyers, competitive markets & users have paid the cost

• Little point in reforming energy markets without

benefiting the users of energy

A $6 Billion Hole in the NEM! One Way Users Have Lost Out

• Differential regional spot prices has cost end-users

$6 billion since NEM start

• Caused by transmission & structural problems

$0/MWh $20/MWh $40/MWh $60/MWh $80/MWh $100/MWh 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 $0 $2 $4 $6 $8 $10

Cumulative RRP Difference value QLD 12MMAv NSW 12MMAv VIC 12MMAv SA 12MMAv SNOW 12MMAv

12MMAv SPOT PRICE ($/MWh) CUMULATIVE DIFFERENTIAL SPOT PRICE VALUE ($ billions)

Excessive Rates of Return for Energy Monopolies – Another Way Users Have Lost Out

ACCC - Vic Gas IPART - Gas OFFGAR - Gas Dist OFFGAR - EPIC ESC - Gas IPART - Elec Dist ORG - Elec Dist QCA - Elec Dist ACCC - Transgrid ACCC - ElectraNet ACCC - Powerlink ACCC - SPI PowerNet IPART - Water Transend CE - 6.80% EA - 6.49% IE - 6.54% AIE - 6.82%

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 YEAR

Gas - ACCC 1998 (Trans) Gas - IPART 2000 (Dist) Gas - OFFGAR 2000 (Dist) Gas - OFFGAR 2002 (Draft) Gas - ESC 2002 Elec - IPART 1999 (Dist) Elec - ORG 2000 (Dist) Elec - QCA 2000 (Dist) Elec - ACCC 2000 (Transgrid) Elec - ACCC 2002 (ElectraNet)) Elec - ACCC 2001 (Powerlink) Elec - ACCC 2002 (SPI PowerNet)) Water - IPART 2000 UK Gas - OFGEM 2001 (Transco) UK Gas - OFGEM 2002 (Ind Trans) UK Elec - OFGEM 1999 (Dist) UK Elec - OFGEM 2000 (NGC) UK W&SCo - OFWAT 1999 (Large Co) UK WoC - OFWAT 1999 (Small Co) US Gas - Average by year US Elec - Average by year Elec Transend 2003 Elec Country Energy Elec EnergyAustralia Elec Integral Elec Australian Inland

ESTIMATED WACC ("Vanilla" Real, post-tax)

US RoR estimated real, post-tax @ 60% gearing

The Way Forward – If We Are To Get It Right For Energy Users

• Let’s remind ourselves of

– IC energy inquiry – Hilmer – Original basis for NEM and gas reform – Parer – ABARE analysis of electricity markets (R.I.P.)

• It’s clear what we need to do

– But it’s taking too bloody long – Meanwhile, we are costing ourselves

• Let’s take a look at the main bits again …

Competition, Market Structure & Market Power

… one key to overcoming the $6 billion hole

Market Structure

• We have taken some important steps, but have not

gone far enough

• Vertical separation (except in WA?)
• Horizontal separation of generation poor in NSW,

Qld, WA, SA & Tas (1/6 isn’t good enough)

• Gas upstream & retail competition still lacking
• This situation means we have market power

problems that still need to be dealt with

Fixing Markets

• Further horizontal separation of generation

needed in NSW, Qld, WA & Tas

• Measures needed to enhance upstream gas

competition

• Fixing transmission in the NEM

– National approach needed – at least to planning & approvals – Better process needed to deal with constraints – Need +/- incentives for service – Need free flowing transmission links

• A key to competition, trade, liquidity, reliability, etc

• Demand management

– NEM is a supply-side dominated market – Healthy NEM needs a demand side response (DSR) – A complex, difficult and longer-term issue, but the gains make it very worthwhile – EUAA’s DSR trial shows there is a practical and effective way forward (worth $2 billion pa)

• Gas reforms

– More upstream competition needed – Some emerging through market, new contracts, etc – Policy & regulatory action needed to re-enforce this

• Pipelines

– A key to competition in gas supply – Existing regulation appropriate for mature pipelines – Need to deal more effectively with new pipelines

Regulating Energy Networks

• Monopolies and need to be regulated
• Support continued use of incentive-based

regulation, but it has been overly-generous to networks

• Regulation needs to improve and not

become static

• Is there a case for performance-based

regulation?

Our Conclusions

• If we can’t take these structural & other reforms

– Then we need stronger regulation to keep market power in check when it breaks out – Current approach of relying on instruments, powers of instruments such as National Electricity Code and TPA is totally inadequate

• Unless there is a decent policy & regulatory

response soon, we have no choice but to support stronger and more specific regulatory powers

– Electricity has strong scope for market power abuse that cannot be left unchecked – Hope gas could be handled through more effective application of existing laws and instruments

The MCE & Implementing Parer

• Critical role & users looking for leadership and action on

all major fronts

• Useful first step in June

– Looking for other positive signs from today’s meeting

• Energy regulator – EUAA’s check list

– Independent (from Govts/industry) & transparent – National & pro-competitive objectives – Seamless role along the whole energy chain – Appropriate powers, enforcement & penalties – Rationalise number of regulators & processes – Consultation & involvement from users – Resources

• Action on regulator not enough

– Need steps in other areas too