Philip Williams, Frontier Economics, presented at the Federal Court Judges Competition Law Conference today. Philip's paper examines the relevance of economic efficiency to the new language in s46. He puts forward two propositions.
Philip leads the legal and competition practice at Frontier Economics.
The Australian Competition and Consumer Commission (ACCC) announced today that it has cleared two proposed acquisitions in the out-of-home advertising sector: the acquisition of APN Outdoor Group Limited by JCDecaux SA and the proposed acquisition of Adshel Street Furniture Pty Ltd by oOh!media Limited.
All four companies provide outdoor advertising, however there were crucial differences between the type of outdoor advertising. Frontier Economics (Asia-Pacific) was retained by lawyers for JCDecaux to provide economic advice. The operations of JCDecaux were essentially restricted to small format street furniture, a segment in which APN Outdoor had no presence. As a consequence, there had been limited competition between the two parties, both in the supply of outdoor advertising and the acquisition of sites. Similarly, Adshel and oOh!media operated in complementary segments. The absence of competition between the merging parties led the ACCC to conclude that “neither of the proposed deals is likely to substantially lessen competition”.
Frontier Economics regularly undertakes empirical analysis for clients in competition matters.
Chief Scientist Alan Finkel reached into Stalin’s drawer of economic planning tools many times when he made recommendations to the state about how to improve the power system. Like collectivism, in practice, Finkel’s recommendations do not seem to be going well.
One of Finkel’s signature recommendations was the development of an integrated grid plan “..to facilitate the efficient development and connection of renewable energy zones across the National Electricity Market”. The Australian Energy Market Operator (AEMO) renamed Finkel’s integrated grid plan the Integrated System Plan (ISP). AEMO states that its “… first ISP delivers a strategic infrastructure development plan, based on sound engineering and economics”, the latter part of this quote being a favourite energy mantra of Prime Minister Malcolm Turnbull.
No doubt Finkel had in mind that such a plan could be useful for policy makers if it was undertaken professionally and free of politics. AEMO states that its ISP is “a cost-based engineering optimisation plan” and that the ISP modelling “applied technology-neutral analysis to identify the required level and likely fuel type of supply investments required to meet future needs.” (AEMO, Integrated System Plan, July 2018, page 3.)
However, the modelling undertaken for the ISP requires the exercise of judgement, and there are some areas in which this judgement appears to be made to support certain conclusions. This note highlights several modelling and forecasting assumptions, that are hard to justify on an objective basis, which have skewed the final results. This raises serious questions about the usefulness of the ISP for policy makers and about the independence of AEMO itself.
Between AEMO’s original release of its ISP modelling assumptions (in March 2018) and its release of the modelling results in the ISP report (in July 2018), AEMO substantially increased its assumed long-term coal price forecast:
No other fuel prices were updated during this time.
AEMO states that these updates were to reflect the coal price forecasts from the Department of Industry’s June 2018 release of its Resources and Energy Quarterly report. But the long-term coal price forecast from this report was only 5% higher than the equivalent forecast from the December 2017 release of the report. This doesn’t seem to justify a 90% increase in assumed coal prices.
Were these coal price assumptions updated to ensure that no new coal plant was part of the future generation mix in the ISP?
In the same Resources and Energy Quarterly reports from the Department of Industry, the long-term gas price forecast increased by 10-15% between the December 2017 report and the December 2018 report. Given that the Department of Industry made a larger upward revision to gas price forecasts than coal price forecasts, why did AEMO not update its assumed gas price forecast at the same time that it updated its assumed coal price?
The emissions trajectory modelled in the ISP is the trajectory to meet a 28% reduction in carbon emissions on 2005 levels by 2030 (consistent with the Paris agreement). Beyond 2030, the ISP models an acceleration of the emissions reduction trajectory to achieve a 70% reduction in 2005 levels by 2050.
This accelerated target is not current policy. Was this emissions trajectory chosen to ensure that the future generation mix is in the ISP is made up almost solely of renewable and storage?
In a future in which coal prices are not as high as AEMO forecast, and the emissions reduction trajectory beyond 2030 does not accelerate as AEMO has assumed, is investment in coal part of the least cost mix of new generation? Did AEMO model its original, lower, coal prices while developing the ISP?
What are the implications of this for the views AEMO put forward in the ISP? Would there be less investment in renewables? Would there be less need for development of transmission investment to support renewable energy zones?
The New South Wales Independent Pricing and Regulatory Tribunal (IPART) published today a draft decision on its 2018 review of its approach to conducting financeability tests. Financeability tests are used by some regulators in the UK, and in Australia by IPART and the Victorian Essential Services Commission, to check that businesses are likely able to maintain, over the next regulatory period, an investment grade credit rating under the revenue allowances provided by the regulator’s pricing decisions.
If a pricing decision provides a regulated business with insufficient cash flow to meet its debt obligations, its creditworthiness could deteriorate, and the price it must pay to attract new finance (or to roll over existing finance) may increase. These higher costs would either flow through to consumers, or result in the business being unable to attract the funds it needs to invest in the assets required to deliver services to consumers. Financeability tests are therefore an important tool to ensure that a regulator’s decisions do not inadvertently place regulated businesses under financial strain, the consequences of which may be borne by consumers over the long-term.
IPART has concluded provisionally that its financeability tests are working well. However, IPART has proposed a number of changes that it considers would improve the effectiveness of its tests.
Frontier Economics is advising the Sydney Desalination Plant through IPART’s review of its financeability tests.
A recent opinion piece by Frontier Economics managing director Danny Price discusses energy policy in Australia and potential outcomes for the sector from the policy path that is being travelled down. Danny argues that the potential for widespread blackouts has increased considerably over the past two years, due to the current policy environment.
“Compared with last year, the number of times that AEMO (the Australian Energy Market Operator) knowingly risked the system going black increased by nearly 60%, and compared to the year before that, by 75%. We are destined for another avoidable uncontrolled collapse of the power system – the mistakes of South Australia have not been heeded. The fault for this reckless behaviour will lie squarely at the feet of the AEMO Board, and with the government for encouraging AEMO’s unaccountability. “
