The Australian Competition and Consumer Commission (ACCC) has denied authorisation to the proposed NSW electricity "Gentrader" co-insurance arrangements in a final determination released on 20 May 2010.
The ACCC maintains that:
- insurance arrangements offer public benefits which are, at best, only marginal
- in the absence of co-insurance arrangements the NSW Government's Energy Reform Strategy will be able to proceed without further amendment, given that there is a range of other adequate mechanisms available for managing "firmness" risk.
The NSW Energy Reform Strategy includes plans to disaggregate NSW's three electricity portfolios into five Gentrader bundles, which will result in separate ownership of electricity generators (which would continue to be held as state owned corporations) and the contractual rights to trade the electricity generated from them (which would be privately owned by the "Gentraders").
The state owned generators applied to the ACCC for authorisation of a scheme of co-insurance which was developed as part of the Gentrader model. The co-insurance scheme is a risk management strategy under which a Gentrader who is unable to meet its firm capacity requirements (due to a plant outage) is provided with financial compensation by one of the other Gentraders.
On 25 March 2010 the ACCC issued a draft determination signalling its intention to deny authorisation to the proposed co-insurance arrangement – for further details please see our e-Alert from the 7 April 2010 entitled "ACCC proposes to deny authorisation to co-insurance arrangement".
The NSW Government's submission in response to the draft determination
The NSW Government (through the government owned generators Macquarie Generation, Delta Electricity and Eraring Energy) made a submission to the ACCC in response to the draft determination.
In its submission the Government rejected the ACCC's view that the Energy Reform Strategy could be implemented without the co-insurance arrangement. The Government argued that the energy reforms are so integrated that the removal of the co-insurance element may necessitate changes to other aspects of the Energy Reform Strategy, including to the planned disaggregation of the state's three electricity generators.
In the absence of the co-insurance arrangement, the Government argued that the creation of five Gentrader bundles is likely to reduce the number of financially firm contracts and make it more difficult for new entrants to participate in the market. This may in turn have an effect on competition and electricity prices. For these reasons the NSW Government has suggested that fewer than the five planned Gentrader bundles may be offered to private sector bidders if co-insurance does not form part of the reform strategy.
The ACCC's final determination
Although the ACCC's final decision addresses various arguments made in the Government's submission, the reasons ultimately given for denying authorisation are not substantially different from the reasons put forth in the draft determination.
The ACCC maintains, contrary to the Government's position, that co-insurance arrangements are not necessary for the success of the Energy Reform Strategy as a whole because a variety of other risk management options are available to Gentraders. In the absence of co-insurance the Gentraders will be able to utilise a range of alternative strategies such as using physical plant, contractual arrangements and financial products to limit risk.
The ACCC also asserts that these alternative mechanisms are at least as effective at managing risk as the co-insurance method, particularly in the long term. While the ACCC accepts that any of the alternative mechanisms, if utilised alone, may not be as effective as co-insurance arrangements, it anticipates that the Gentraders would manage risk with a combination of strategies as appropriate to their particular circumstances. In light of its conclusions about the effectiveness of other risk management strategies, the ACCC is not satisfied the proposed co-insurance arrangements offer more than a marginal public benefit.
The ACCC also considers that any marginal public benefits likely to be derived from the inclusion of the co-insurance scheme in the overall package of energy reforms do not outweigh the public detriments of including such an arrangement
The final determination also considers the Government's suggestion that it may reduce the number of Gentrader bundles offered if the Energy Reform Strategy proceeds without co-insurance, by acknowledging that the re-aggregation of any of the Gentrader bundles may limit the competitive benefits achieved by the reforms. However, the ACCC is not satisfied that a sufficient nexus exists between the denial of authorisation for co-insurance and any actions to re-aggregate the Gentrader bundles such that the former scenario will necessarily give rise to the latter. For this reason, the ACCC has compared the benefits and detriments which are likely to be created by the inclusion of the co-insurance scheme with those likely to arise if the reform package is introduced in its current form but without the co-insurance arrangement (rather than with a situation where co-insurance is not authorised and the Energy Reform Strategy proceeds in an altered form).
NSW Government: energy reform process on track
The NSW Government has recently issued a media release stating that the energy reform process is on track and that data rooms will open on 1 July 2010.
The NSW Government stated that "In light of the ACCC's decision not to endorse the Government's co-insurance proposals, the Government will now offer four Gentrader bundles for sale with the Macquarie Generation portfolio to be offered to the market as a single Gentrader contract bundle."
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