Who will guard us from the guardians?

Electricity retailing and generating, unlike networks, are markets with no barriers to entry and with dozens of competing firms. This distinction of the two facets of electrcity supply is lost on the ACCC and with its rejection of the sale of NSW generation business MacGen to AGL, the ACCC maintains its long history of mistaken analysis in the energy industry.

ACCC officers were warning of electricity networks favouring their affiliated retailers at a time when, through force of capital markets, they were voluntarily disaggregating the two activities (having a regulated entity joined up with the red-in-tooth retailing did not attract the best value).  They further resisted the joining together of retail and generation, preferring the stylized market when retailers and generators contract at arm’s length rather than the risk reduction approach of joint ownership preferred by the market participants.

The decision to reject AGL’s proposed acquisition of MacGen in NSW is consistent with the jaundiced framework within the ACCC works.  AGL is short on generation capacity, particularly baseload, which is why it valued MacGen more than other possible suitors.  The merger would leave AGL with a 24 per cent market share, which the ACCC, by adding the share of two (rival) businesses, Origin and Energy Australia, says is close to a monopolistic 80 per cent share! This also means that if MacGen were to be split into two and either Origin or EA were to be the successful bidder for the other half, the ACCC would still block the sale.

As is common with institutions seeking relevance for themselves, the ACCC also conducts an analysis in terms of market share by state.  But the interlinked National Electricity Market makes this a poor basis for policy, even though the interconnectors occasionally constrain.

The ACCC has form in the energy market generally.  Some years ago it concocted a raid in front of invited news cameras where its officers were seen walking out of Caltex’s head office with (empty) cardboard boxes of alleged evidence.

Seeing every petrol bowser as an agent of monopoly, it also got caught manipulating data on petrol prices in an effort to prove regional petrol stations were tacitly conspiring to defraud the consumer.

More recently it has banned door-knocking marketing techniques by electricity retailers, a godsend to the incumbents who no longer need to be as alert to price sharpness, since the ACCC’s anti-competition ruling means new players will now have more difficulty in taking their customers by offering better value.  And elsewhere it is seeking to prevent consumers being able to take advantage of cheap petrol previously on offer as a result of the marketing war between Coles and Woollies.

The ACCC works off a textbook market ideal where disaggregated players operate in atomistic competition. The real world has major corporations with integrated supply and marketing chains.  This brings workable competition – indeed in airlines a “duopoly” with 95% of the market provides competition so fierce that one of the players is facing bankruptcy.  With its decision on MacGen the ACCC has demonstrated its inability to understand how firms work and how they must contract in-house as well as with independent entities to ensure optimal risk coverage. And denying the best sales opportunity means a cost on the Macgen shareholders – the people of NSW.

The ACCC’s fundamentally anti-competition approach to life supports its vested interest in discovering and conjuring up situations that appear to give it meaning.  My colleague John Roskam has catalogued a plethora of issues where the ACCC is providing negative value-added and has called for its abolition.

To the ACCC’s traditional brew is added the appointment of a long time ALP insider, Rod Sims, as the Chair of the Commission.  Mr Sims may be no more interventionist than the agency he heads.  But he brings no experience in running a major organization and he is failing to keep to the budget that the government which appointed him set and is asking for $100 million to supplement it.

Addendum.

This material compiled by Alinta illustrates that the main growth in the energy industry has been with the regulators.

regulator growth1

 

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11 Responses to Who will guard us from the guardians?

  1. Ed

    Some years ago it concocted a raid in front of invited news cameras where its officers were seen walking out of Caltex’s head office with (empty) cardboard boxes of alleged evidence.

    Seeing every petrol bowser as an agent of monopoly, it also got caught manipulating data on petrol prices in an effort to prove regional petrol stations were tacitly conspiring to defraud the consumer.

    The boxes were empty? For the love of God. For these incidents alone they should be shut down, or at least merged with some other department. Industry, for instance.

  2. Ed

    But he brings no experience in running a major organization and he is failing to keep to the budget that the government which appointed him set and is asking for $100 million to supplement it.

    That’s a big shortfall.

  3. Armadillo

    More recently it has banned door-knocking marketing techniques by electricity retailers

    Wondering how that is any different to ‘One Big Switch’ (except they are at your door rather than on your TV). I’d rather shop around myself than make Rimmers ex Chief of Staff (Laughlin Harris) a multi millionaire.

  4. Splatacrobat

    They further resisted the joining together of retail and generation, preferring the stylized market when retailers and generators contract at arm’s length rather than the risk reduction approach of joint ownership preferred by the market participants.

    The decision to reject AGL’s proposed acquisition of MacGen in NSW is consistent with the jaundiced framework within the ACCC works. AGL is short on generation capacity, particularly baseload, which is why it valued MacGen more than other possible suitors. The merger would leave AGL with a 24 per cent market share, which the ACCC, by adding the share of two (rival) businesses, Origin and Energy Australia, says is close to a monopolistic 80 per cent share!

    Origin currently not only retails but they generate with gas they extract. How is it they won’t allow AGL to do the same?
    Here’s how:
    The concentration of market power into three companies would put the squeeze on small retailers and push up prices for households and small business,” Greens NSW MLC John Kaye said in a statement

    Why should Kaye care? As far as he’s concerned he would rather see wind farms pushing prices up and the dirty power station polluters closed.

  5. H B Bear

    WA Liberal government is currently re-merging the major electricity generator and retailer after being separated by Labor, CCI and their Economics 101 advisers. It made even less sense here in WA outside the NEM but that never stopped anyone.

  6. Jim Rose

    I met with the head of the ACCC mergers branch ages ago and asked what does it mean when a merger does not substantially lessen competition.

    He said it meant the merger almost certainly never lessens competition.

    You would get better odds on a beyond reasonable doubt standard of proof.

  7. Tel

    The concentration of market power into three companies would put the squeeze on small retailers and push up prices for households and small business,” Greens NSW MLC John Kaye said in a statement

    The prices are set by an “Independent Tribunal” and anyhow the retail prices are only very vaguely related to the generation price (generation makes up about 20% of the retail price).

  8. Jim Rose

    I should add that mergers are a very risky way to consolidate market power.

    Two firms became sub-optimally larger with irreversibly higher costs and a larger hierarchy with larger spans of control. If there is new entry, this over-sized firm is at a cost disadvantage.

    Plenty of mergers aimed at lower costs fail, so a merger that raises costs must be even more risky.

    Plenty of us have been through workplace restructurings where productivity dropped during the restructuring and the new structure and organisation was often no better.

    A cartel is a much better option or just a merger that does not combine the respective operations in any way and just becomes a multi-plant monopoly or multi-plant dominant firm.

    The infallible test of an anti-competitive merger is whether market rivals oppose it.

    Why would they oppose a merger that leads their rivals to put their prices up? They would oppose a merger that lowers the costs of a rival.

  9. blogstrop

    The ACCC is as flawed as the Australian Press Council, and might as well be discarded for all the good it now does.

  10. The Pugilist

    This goes back to a post Sinc did a while ago about the Structure-Conduct-Performance theory of market structure. I think he spoke about banking or petrol. One of my greatest moments of awakening as an economist was reading a small book by Israel Kirzner on entrepreneurship and market performance. It was then I realised that my intuition that SCP was utter garbage was indeed correct…!

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