On 25 June, the ERA published its inaugural report on the effectiveness of the Electricity Generation and Retail Corporation Regulatory Scheme (the Scheme). This scheme establishes a number of requirements on the merged Synergy in order to mitigate Synergy’s market power as a dominant entity in the WA energy market.
The ERA’s report takes into account four submissions from Synergy and other market participants to its discussion paper released in November 2015. The ERA also held a Stakeholder Workshop held in September 2015 to seek views on what issues should be considered in its review.
The Scheme comprises the Electricity Generation and Retail Corporation (EGRC) regulations, the Segregation and Transfer Pricing Guidelines (STP Guidelines) and the Standard Product Arrangements.
The ERA’s report outlined the three main area of analysis:
- Clarity around the objectives of the EGRC Scheme – the ERA concludes that no specific objectives are included in the EGRC regulations despite the intention of the Scheme having being discussed by Parliament during transmission of the amended Electricity Corporations Act.
- Achieving a level playing field for all market participants – such that Synergy does not show any undue preference to its Retail Business Unit (RBU) and Generation Business Unit (GBU) over competitors and that RBU and GBU have no access to information from the Wholesale Business Unit (WBU) that is also not available to third parties.
- Ensuring confidence in the market – such as transparency in the different arrangements applying to Synergy and other retailers and generators.
The ERA’s key findings are as follows:
“The Scheme is necessary to address the market power arising as a result of the merger of the dominant generator and retailer in the market. The objective should be to mitigate Synergy’s market power to ensure a level playing field for competitors and new entrants to the wholesale and retail electricity markets in order to facilitate competition. This objective must be clearly stated in the Scheme.”
“Providing a level playing field, with third parties treated on an equal basis to Synergy’s retail and generation business units, is key to facilitating competition. A number of improvements are required to ensure this:
- The Scheme currently provides Synergy with significant discretion for determining whether a supply is discriminatory. Further guidance should be set out in the Scheme to remove this discretion.
- Potentially there could be a substantial lag between discriminatory behaviour occurring and it being reported. The collection of information related to annual reviews or audits should occur on a more frequent basis, to monitor performance and compliance. This could be further enhanced by requiring Synergy to self-report any non-compliance, with penalties if it fails to do so, similar to the current Electricity Licencing regime.
- The Standard Product Arrangements could provide a useful tool for price discovery and imposing pricing discipline on Synergy. However, the current arrangements appear to have been developed with the risk to Synergy’s financial position being the primary consideration. This has resulted in products that are under-utilised and unlikely to have resulted in any real pricing discipline being imposed on Synergy. An effective Standard Product Arrangement would require a:
- sufficient range and quantity of products;
- price discovery can only be achieved if the range of products offered adequately reflects the type of product generally required by retailers; and
- a buy/sell spread sufficiently low to ensure Synergy prices efficiently.
- The ring-fencing arrangements should be reviewed to ensure the retail business does not have access to fuel information, or any other information, that is held by the WBU and that is not available to other retailers.”
“Transparency is essential for the creation of efficient and competitive wholesale markets. The ERA considers that amendments are required to improve transparency and require all policies and information required under the Scheme be published. Stakeholders have raised concerns in relation to Synergy’s retail prices. A lack of transparency in the process for setting Synergy’s retail tariffs, including the basis of the Tariff Adjustment Payment (TAP), has contributed to these concerns. The Foundation Transfer Price Mechanism should be amended as soon as possible to ensure it is based on efficient costs.”
A copy of the ERA’s full report is available here.