A combination of Rod Sims, head of the ACCC, economist Ross Garnaut and, now, the father of competition policy reforms that led to the creation of the National Electricity Market, Fred Hilmer, have all highlighted concerns with how state governments are proceeding with privatisation of government assets.
The problem is not with privatisation itself. They all agree that private ownership is likely to lead to more efficient management and less conflicted regulatory structures. The problem lies more with how the assets are being sold that fails to facilitate competitive markets, rigorous regulation of natural monopolies and efficient prices for consumers.
Rod Sims observed:
Where governments are increasingly failing is in 'how' to privatise. Privatising in ways that limit competition in order to maximise the sale proceeds is the wrong way.
Such an approach increases the one-off sale proceeds by effectively taxing future generations and Australia’s future competitiveness.
In the east coast electricity market, governments have proceeded with privatisation in a way that has steadily created an oligopoly of three dominant companies integrated across the generation and retailing of electricity – Origin Energy, Energy Australia and AGL. This is likely to give them considerable power over prices, generator market entry and also government energy and climate change policy, as well as strong incentives to exert that power.
Together these companies control 77 per cent of small electricity customers and 85 per cent of small gas customers. And now one of the biggest retailers outside of the big three, Lumo Energy, is up for sale and could possibly fall into their hands as well.
In power generation the degree of dominance on a national basis doesn’t look so significant, but this is obscured by remaining government ownership of generators in NSW and Queensland which are now being sold. Indeed since the chart below was published in late 2013, AGL has won a battle against the ACCC to acquire Macquarie Generation off the NSW Government. This now gives them control over 28 per cent of NSW generation capacity in addition to a quarter of Victoria’s and a third of South Australia’s. One would expect that the big three retailers would be at the front of the queue to buy the Queensland Government generators when they come up for sale as well.
Market share in generation and retail energy markets by state
Source: Australian Energy Regulator (2013) State of the Energy Market - 2013
It also worth noting that their stranglehold over retailing allows them to exert considerable influence over the entry of new power generators. In providing finance to new power plants, bankers like to see a reliable revenue stream from access to end-customers rather than dependence on the highly volatile wholesale electricity market. AGL, Origin and Energy Australia hold the keys to a very large proportion of the end-customer demand.
Since 2009, these three businesses increased their share of generation capacity from 15 to 36 per cent. If we extend our lens to just one extra company – International Power-GDF Suez, who own retailer Simply Energy –then the four control around 70 per cent of generation across all NEM states which have largely privatised their generation assets. Also, investment in new generation by entities that do not also retail energy has been negligible outside of wind power. (A generation source facilitated by the Renewable Energy Target policy which the government appears inclined to neuter after considerable lobbying from the big three as well as state government generators.)
The sale of government assets to the big three wouldn’t be much of a problem if new entrants can easily move in and steal market share. But the available evidence seems to suggest that a large proportion of customers are unengaged in the electricity market and just stick with the existing supplier even though they could save a considerable amount by switching. Market research by upstart mobile service retailer Amaysim found that even though 89 per cent of Australians say that saving money where possible is important to them, over half (56 per cent) effectively ‘set and forget’ when it comes to their personal finances and household utilities, with superannuation and electricity topping the list.
Now the incumbent retailers like to point at statistics from AEMO that show that in Victoria (which doesn’t have retail price regulation and privatised electricity retailing the earliest) around a quarter of customers change retailer every year. But, according to the Victorian Essential Services Commission, this inflates the number of people making a proactive and considered choice by including people moving house and new meter installations. The VESC believes the number is closer to 17 per cent. In addition, this 17 per cent switching rate isn’t equally distributed across all customers. Instead feedback from smaller tier two retailers suggests that it is the same customers switching over and over again.
The chart below illustrates that in Victoria, where retail price cap regulation has been removed, there is a huge spread in the amount customers are charged for electricity relative to NSW and Queensland, which still maintain retail price regulation. It’s also worth noting that Victoria’s network costs tend to be lower than NSW and Queensland so the fact average prices (indicated by black marks in middle of orange bars) are similar means retailers capture larger margins. This seems to indicate that once retail price regulation is removed, retailers are able to extract a substantial laziness tax from those unengaged customers.
Average and spread of household retail electricity costs by state and network distributor
Source: Australian Energy Regulator (2013) State of the Energy Market – 2013
Now in spite of all of this, Richard McIndoe, former CEO of Energy Australia, seems to think the electricity market is “extremely fragmented”. He told The AFR that by blocking AGL’s acquisition of MacGen the ACCC would leave us with, “an industry structure that doesn’t allow a rational response [to overcapacity]” by shutting down power plants. Interestingly he noted that the ACCC needed to recognise that the rise of rooftop PV and greater energy efficiency had transformed the competitive landscape. Meanwhile, his company is furiously lobbying to undermine both these options.
Rod Sims was bang on the money when he observed:
Some in business are incredulous that the ACCC would not wave through a merger when investment returns are low so that the merger parties can create, in their terms, a more rational market with sensible, and so higher, pricing.
As someone who has spent 15 years advising companies on corporate strategy I know that companies generally expect such orderly pricing with 2-3 players and high entry barriers.
…While it may be inconvenient for established players to be challenged by new entrants, consumers are the ones who lose from higher prices and less innovation. Competition is, and is meant to be, at times a disruptive process for the companies involved.