Why the energy regulator’s report into wholesale market prices is a joke

The incumbent energy industry, and its lobbyist representatives and sympathetic media, were quick to make much of the Australian Energy Regulator’s investigation into wholesale price movements that appears to have absolved the industry of an abuse of market power.

The AER concluded that any market abuse was transitory,  and would be removed by more competition. The industry used it as another excuse to fight back against energy minister Angus “Biggus Stickus” Taylor’s proposal for heavy intervention in the sector.

We don’t agree with much of what the federal government is proposing here, but consumers should not feel reassured by the AER’s conclusions. They fly in the face of most consumer’s experience of electricity prices, which have jumped sharply, and according to the Australian Bureau of Statistics are now at a record high.

The AER’s defence, that any price rises were the result of increased input costs, appears nonsensical in the face of the trebling in profits by each of the main gen-tailers over the 2018/18 financial year.

But maybe that is because the AER simply doesn’t know. As it admits in its own report:

“We haven’t assessed the extent to which participants are exposed to spot prices and how this might affect their incentives to exercise market power,” the AER writes.

“While we have some information on the extent participants are vertically integrated, we do not have access to information on their contract positions. The ACCC and the Australian Energy Market Commission (AEMC) have made recommendations to improve transparency for over the counter (OTC) transactions (chapter 7).”

That’s right, the control of the incumbent utilities over the energy industry is so complete and the operations so opaque that not even the regulator is allowed to know what’s going on. As we reported in the latest example of market gaming in South Australia, the AER is not even allowed to talk to the big utilities’ energy traders to ask what went on when the price spikes to the market cap, or at least beyond $5,000.

Can you imagine a rule that would prevent the police from being able to interview witnesses to a suspected crime? Of course not. It’s a complete sham.

The Australian energy industry has profited from the mantra that “confusion is profit”, but this refers to the mind-boggling complexity of the bills they send consumers. The other unofficial mantra is “ignorance is bliss”, and this seems to refer to the authorities that are supposed to manage the industry and protect consumers.

Clearly, however, consumers are not being protected. They are being, and have been, completely screwed by the utilities – first by the networks and their gold plating, and then by the “gen-tailers”, who get two bites of the cherry by gaming wholesale markets and then slapping on huge fees just for the privilege of sending consumers a bill.

Consumers are clearly paying well over the actual cost of electricity. The massive profits that have been pocketed by the big utilities – both gentailers and network operators – in recent years confirm that.

It is simply not credible that the price of electricity paid by consumers should be 40c/kWh. In some cases, particularly those who use little energy, it can be double that. Regulators and politicians, meanwhile, wring their hands and promise “intervention” and big sticks, and others blame the one element of the pie that is not at fault, wind and solar.

The big utilities enjoy almost complete regulatory capture of their industry – their executives swing in a merry-go-round from utility, to government department, to minister’s office, to the regulators and the rule-makers, and then back into the peak lobbying body or the utility from whence they came.

As Adrian Merrick from Energy Locals observed after reading the AER report – which, I must say, provides a useful resource of nice and interesting graphs – if the regulator really wanted to find out what was going on, it needs to look deeply into the contracting activities.

Merrick and his team say it is deliberate withholding of forward contracts by generators that’s believed to be causing much of the current spike in 2019 contract prices. It is the contract market where the problem lies. Contracting is critical for large customers to hedge their positions, and for retailers.

“The fact that the national regulator can’t look into this as part of a report into the wholesale market is laughable. And any government – federal or state – should demand this transparency from generators,” he said.