The Final Harper Competition Policy Review Report (Harper Review) was released on 31 March 2015. We set out below the key potential implications for wholesale electricity markets.
The Harper Review recommends creating a new body (the APR) to regulate national access and pricing across various natural monopoly industries.
In addition to regulating access and pricing, the Harper Review proposes that the APR would take on all functions currently undertaken by the Australian Energy Regulator (AER) pursuant to the National Electricity Law (NEL) and be responsible for enforcement of the National Electricity Rules (NER) in wholesale markets. In order to fulfil that function, the APR would in our view need to ensure that it had sufficient expertise not only in relation to access and network pricing, but also in relation to the operation of wholesale electricity markets.
Integration with Western Australia and Northern Territory
The Harper Review supports greater integration between the National Electricity Market (NEM) and electricity markets in Western Australia and the Northern Territory, citing the observation that alignment of the legislative, institutional and market arrangements in those places with the NEM would remove unnecessary barriers to entry into other electricity markets across Australia for retailers and reduce operational and governance costs. In Western Australia, the second phase of its electricity market review commenced on 24 March 2015. This involves work-streams seeking to achieve various objectives including the removal of barriers to entry of generation businesses, full retail contestability and improving various wholesale market operations and processes. In the Northern Territory, the information paper published in February 2014 observed that the Government was committed to the adoption of national electricity laws and rules.
Misuse of market power
The Harper Review recommends bringing the misuse of market power prohibition into line with the other provisions in Part IV of the Competition and Consumer Act 2010 (CCA). If implemented, these amendments would expand the reach of section 46 and make it easier to prove a contravention, primarily because of the removal of the 'take advantage' limb and the addition of an 'effects' test.
Although a number of large businesses have advocated against such changes, they would be unlikely in our view to have significant ramifications for the wholesale electricity market. Specifically, there are a number of difficulties associated with the application of section 46 of the CCA to the wholesale electricity market including whether market participants have market power and whether the purpose, or effect, of particular conduct is anti-competitive.
- Relevant to the first issue, in 2013, the Australian Energy Market Commission (AEMC) considered whether generators possessed market power. In seeking to define market power, it distinguished between transient market power, which it found was an inherent feature of a workably competitive wholesale market, and substantial market power, which it defined as "the ability of a generator or group of generators to increase annual average wholesale prices to a level that exceeds estimates of Long Run Marginal Cost (LRMC), and sustain prices at that level due to the presence of significant barriers to entry". In early 2012, NERA undertook an analysis of long run marginal cost and observed wholesale prices and concluded there was no evidence of market power.
- Relevant to the second issue, in 2010, Major Energy Users Inc observed in a rule change proposal to the AEMC that section 46 of the CCA did not address the problem sought to be addressed by that proposal because generator's actions are not motivated by an anti-competitive purpose. It observed further that the TPA (now CCA) focuses on whether conduct damages competitors, not on the effect of the actual exercise of market power to extract monopoly revenues.
Ultimately, the application of section 46 to particular conduct will depend on the conduct and the drafting of the section.