The Australian Energy Market Commission (AEMC) has been examining the merits of its Optional Firm Access (OFA) proposal over the past fifteen months. The proposal was devised to address a number of perceived problems in the design of the Australian National Electricity Market (NEM). These perceived problems included generators bidding below their costs in order to be dispatched out of merit order, a lack of signals to promote efficient generation locational investment decisions and the imperfect reliability or ‘firmness’ of hedging instruments for supporting interstate trading. The AEMC contended that OFA would resolve these issues as well as partly transfer the risks of future transmission investments from consumers to generators.

The AEMC’s March 2015 draft report found that the benefits of OFA did not presently outweigh the costs, mainly because the prevailing level of spare generation capacity in the NEM meant that the need for new investment was a decade or more away. Accordingly, most of the benefits from more efficient investment decision-making would also only begin to accrue sometime in the future. In this respect, the AEMC’s draft report stepped back from the more positive assessment of OFA contained in the AEMC’s first interim report of July 2014. Frontier (Australia) responded to the first interim report; our response is available here.

On behalf of a group of NEM participants (AGL Energy, Origin Energy, Snowy Hydro and Hydro Tasmania), Frontier’s response to the AEMC’s draft report has now been published. We find that OFA does not offer an appropriate way forward for the NEM, irrespective of potential future changes in market conditions and uncertainty regarding generation technologies and costs. This is primarily because, in our view, the AEMC did not establish the existence of significant problems in the current market design that OFA would be likely to address. Our report also found that OFA could increase rather than reduce the risks faced by consumers and would be more likely to harm the efficiency of generation and transmission investment coordination than to improve it. Finally, our report highlighted a number of governance concerns with the OFA proposal.

For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call on +61 (0)3 9620 4488.

Networks NSW has today announced that it intends to appeal some aspects of the Australian Energy Regulator’s (AER) determinations (made on 30 April 2015) on the revenues that these networks will be allowed to earn over the next few years.

The CEO of Networks NSW (which comprises Ausgrid, Essential Energy and Endeavour Energy) announced that it would appeal the AER’s decisions both regarding average annual cuts of $324m to operating expenditure and not to provide a workable transition plan to implement continuing efficiency improvements. Legal appeals will be lodged with the Australian Competition Tribunal today and with the Federal Court by 28 May.

One of the new tools that the AER used in order to justify significant reductions in operating expenditure allowances was benchmarking. Drawing on this approach, the AER concluded in its final decisions that the base year operating expenditures of Ausgrid and Essential Energy were inefficient and should be reduced by 24.0% and 26.4%, respectively. This represents a reduction in base year operating expenditure of $118 million for Ausgrid and $110 million for Essential Energy.

Other electricity networks have also been unhappy with the AER’s determinations. ActewAGL has already announced its decision to lodge legal appeals with the Federal Court and the Australian Competition Tribunal against the AER’s final decision.

Frontier (Australia) has advised Networks NSW on assessing the AER’s benchmarking analysis.

For more information, please contact m.okeeffe@frontier-economics.com.au or phone +61 3 9620 4488.

The Final Report of the Harper Committee’s Competition Policy Review was released on 31 March this year.

The Report ranged widely over many aspects of competition policy in Australia but essentially aimed to assess whether Australia’s competition policy was still ‘fit for purpose’. A number of questions were considered, including whether competition policy was making markets work in the long-term interests of consumers, and whether it secures the necessary standards of access and equity.

Of the questions posed, the one that the Legal and Competition Practice at Frontier (Australia) were interested in was whether current policy establishes laws and regulations that are clear, predictable and reliable, in particular with respect to Australia’s Competition Law as embodied in the Competition and Consumer Act.

Since its introduction as the Trade Practices Act in 1974, competition law in Australia has become far more complex but, it could well be argued, less effective. The effectiveness of a law depends, at least in part, on its being understood. In the case of competition law, its basic precepts must be understood by the businesses at which it is directed. It must also be understood by lawyers who advise on its effects and by judges who, ultimately, have to decide what it means.

In the forty years since its introduction, Australia’s competition law has had many additions and changes – but very few deletions. The result of these processes of accretion and amendment is that the persons who should be constrained by the law frequently do not understand the ways in which they are constrained – and those who should be assisted by the law are frequently surprised at how little they are assisted.

The Final Report of the Harper Committee proposes a much simpler and much more principled competition law than we currently have. The simplification can be readily appreciated by reading the suggested new drafting provided in the Report – which drastically prunes the verbiage of the current legislation.

The result is also far more principled than our current law. The suggested drafting is designed to implement the stated aim of the current legislation, which is ‘to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’. It does this by applying the standard of substantial lessening of competition to all conduct (including to conduct undertaken by businesses with substantial market power). It also proposes that the law prohibit, without any enquiry as to its effects on competition, conduct that is highly anticompetitive in most circumstances. In the latter cases, the conduct is so likely to damage the competitive process that it is not worth the cost of the detailed investigation, gathering of evidence and court processes that are needed to prove to a court that the conduct substantially lessens competition.

The Final Report of the Harper Committee is now in the hands of the Government. The Minister for Small Business (the Hon Bruce Bilson) is seeking views of interested parties. Our view is that the Minister has been handed a proposal for a principled piece of legislation that can be understood by those at whom it is directed. We hope this will pass with minimal changes, as modifying it in the interests of lobby groups could well negate the effects of the revision.

For more information, please contact m.okeeffe@frontier-economics.com.au or phone +61 (0)3 9620 4488.