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 $6 Billion Hole in the NEM! One Way Users Have Lost Out 12MMAv SPOT PRICE ($/MWh) CUMULATIVE DIFFERENTIAL SPOT $100/MWh $10 PRICE VALUE ($ billions) Cumulative RRP Difference value QLD 12MMAv NSW 12MMAv $80/MWh $8 VIC 12MMAv SA 12MMAv SNOW 12MMAv $60/MWh $6 $40/MWh $4 $20/MWh $2 $0/MWh $0 1 1 1 1 1 2 2 2 2 2 2 9 9 9 9 9 0 0 0 0 0 0 9 9 9 9 9 0 0 0 0 0 0 5 6 7 8 9 0 1 2 3 4 5 • Differential regional spot prices has cost end-users $6 billion since NEM start • Caused by transmission & structural problems
Excessive Rates of Return for Energy Monopolies – Another Way Users Have Lost Out 8.0% ESTIMATED WACC ("Vanilla" Real, post-tax) 7.5% Gas - ACCC 1998 (Trans) Gas - IPART 2000 (Dist) Gas - OFFGAR 2000 (Dist) 7.0% Gas - OFFGAR 2002 (Draft) ACCC - Vic Gas ORG - Elec Dist OFFGAR - EPIC Gas - ESC 2002 AIE - 6.82% ESC - Gas CE - 6.80% Elec - IPART 1999 (Dist) ACCC - Transgrid Transend Elec - ORG 2000 (Dist) OFFGAR - Gas Dist IE - 6.54% 6.5% Elec - QCA 2000 (Dist) EA - 6.49% Elec - ACCC 2000 (Transgrid) ACCC - Powerlink Elec - ACCC 2002 (ElectraNet)) IPART - Gas Elec - ACCC 2001 (Powerlink) ACCC - ElectraNet IPART - Elec Dist 6.0% Elec - ACCC 2002 (SPI PowerNet)) ACCC - SPI PowerNet Water - IPART 2000 QCA - Elec Dist UK Gas - OFGEM 2001 (Transco) UK Gas - OFGEM 2002 (Ind Trans) IPART - Water UK Elec - OFGEM 1999 (Dist) 5.5% UK Elec - OFGEM 2000 (NGC) UK W&SCo - OFWAT 1999 (Large Co) UK WoC - OFWAT 1999 (Small Co) US Gas - Average by year 5.0% US Elec - Average by year Elec Transend 2003 Elec Country Energy Elec EnergyAustralia 4.5% Elec Integral US RoR estimated real, post-tax @ 60% gearing Elec Australian Inland YEAR 4.0% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
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
Recommend
More recommend
