Hydro Tasmania: the "benevolent monopolist"?

Tasmania has opened up its electricity market to new retailers, but with Hydro Tasmania remaining such a powerful player, will any retailers come to the party? For now, the 'big three' are steering clear.

The Tasmanian government has taken the first step in implementing its Electricity Reform Project, by introducing the Electricity Reform Bill. The Bill will enable the sale of Aurora Energy’s customer base, as well as other reforms to the state’s electricity industry.

It follows an 18-month review by the Parliament’s Expert Panel, which found that even if Aurora’s dominance over the retail market is removed, electricity retailers may still lack the confidence to enter Tasmania, due to Hydro Tasmania’s effective monopoly of the wholesale market and ability to set spot prices.

One of the Panel’s key recommendations was to separate Hydro Tasmania’s generation and trading functions, then transfer its trading functions to three independent state-owned entities.

The Electricity Reform Project has shied away from the Panel’s recommendation and instead adopted a regulatory approach, which it hopes will mimic the benefits of physically separating Hydro Tasmania’s functions and give new retailers confidence to enter the market.

The Electricity Reform Project

The Electricity Reform Project is made up of four ‘key’ features and three ‘supporting’ features. The key features are:

1. Hydro Tasmania’s wholesale market activities will be regulated by the independent Tasmanian Economic Regulator from July 1, 2013.

2. Full retail contestability (FRC) will be introduced from January 1, 2014.

3. Aurora’s retail customers will be sold and transferred in blocks to new, competing private sector retailers, from the start of FRC on January 1, 2014.

4. Aurora’s distribution system and Transend’s transmission network will be integrated to form a single combined network business. The businesses will be merged from July 1, 2014.

The supporting features are:

1. Hydro Tasmania will continue to grow its clean energy retailing business, Momentum, subject to relevant approvals and ongoing reviews to assess whether the venture is an appropriate investment of public capital.

2. Aurora’s retail service functions will be merged with Momentum’s functions, once the transition of retail customers to new retailers is complete.

3. An assessment of the Tamar Valley Power Station assets will be obtained and where the strategic value of state ownership of the assets, or parts of the assets, exceeds a sale value, those assets will be transferred to Hydro Tasmania.

Hydro Tasmania: the “benevolent monopolist”

Hydro Tasmania’s role within the Tasmanian electricity industry is unique compared to other jurisdictions within the National Electricity Market. In no other jurisdiction does one company dominate power generation output to the same extent.

Hydro Tasmania’s dominance means it has the power to set spot price levels at any level, and at any time. To compound matters, Hydro Tasmania is also the only party with whom retailers can enter into contracts to manage spot price market risk. According to the Panel, it is this structural feature that has been the biggest barrier to new retailers entering the Tasmanian electricity market.

While most of the time, Hydro Tasmania does not in fact exercise its market power, the Panel concluded that retailers will simply not enter the Tasmanian market on the assumption that Hydro Tasmania will remain a “benevolent monopolist”. The Panel’s final report concluded that if FRC was declared without serious wholesale market reform, the best that Tasmania could hope for was a “small number of niche retailers to enter the market, with limited offerings to customers.”

Is the regulatory approach enough?

From 1 July 2013, Hydro Tasmania’s wholesale market activities will be regulated by the Tasmanian Economic Regulator. The Government’s regulatory approach will involve the following:

-- Hydro Tasmania will be required to make available a number of products at all times, including standard financial swaps (which are the main hedging instrument used in the NEM);

-- A range of caps will be introduced, which place an upper limit on the price to be paid by the counterparty retailer in times of high spot prices;

-- The Tasmanian Economic Regulator will regulate prices, by reference to Victorian contract prices (reflecting the opportunity cost of Hydro Tasmania selling into an alternative market); and

-- A transparent monitoring, compliance and disclosure regime, which will be administered by the Tasmanian Economic Regulator.

The government has not ruled out the possibility of separating Hydro Tasmania’s functions in the future. But, for now, it seems satisfied that this should be enough to provide confidence to retailers that their risks can be appropriately managed.  

It is still early days, but so far, interest from retailers has been muted, with none of the big three retailers indicating publicly that they have plans to enter the Tasmanian retail market.

Clare Corke and Tina Latif are banking and finance lawyers, based in Melbourne.

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