Demise of the Market Monitor

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On 3 October 2019 IPART released its draft review of the performance and competitiveness NSW Electricity Market. A significant takeaway from the draft report is IPART’s recommendation that it be relieved of its role as the ‘Market Monitor’ – meaning that this would be the Tribunal’s final review of the NSW electricity market.


















Alex Silcock Compliance Quarter

Legislative background

To understand the role of the Market Monitor, it is necessary to revert to the deregulation of the electricity market in NSW. Prior to the adoption of the National Energy Customer Framework (NECF), electricity prices in NSW were regulated under the Energy Supply Act 1995. On 1 July 2013, the following three laws came into effect:
National Energy Retail Law (Adoption) Act 2012 following which the National Retail Energy Law (NSW) applied;
Energy Legislation Amendment (National Energy Retail Law) Act 2012; and
National Energy Retail Law (Adoption) Regulation 2013.

From 1 July 2013 to 1 July 2014, the electricity market in NSW operated in a state of “partial deregulation” – retail competition was allowed, but regulated prices were still in force. During this period local area retailers in certain circumstances were required by legislation to supply electricity by reference to a “regulated offer”. The “regulated offer” price was set by IPART.

From 1 July 2014 there was total deregulation of electricity pricing in NSW which resulted in the replacement of the concept of “regulated offer” with “standing offer”. From this point on, all retailers in NSW set their own “standing offer” prices.
Despite the adoption of NECF, the NSW Parliament made several amendments to how the National Energy Retail Law applied in NSW (commonly known as jurisdictional derogations).

From 1 July 2014, IPART no longer set electricity prices, but the National Energy Retail Law (Adoption) Act 2012 provided that the Tribunal retain a residual role as the Market Monitor.

Statutory Powers and Functions

The deregulation of the electricity market was controversial, and the Market Monitor provides a statutory mechanism to regularly review the impact of the change. The Market Monitor’s principal functions are set out in s 234A of the National Retail Energy Law (NSW) and include the following:

(2) The Market Monitor is to monitor the performance and competitiveness of the retail electricity market in New South Wales for small customers.
(3) The Market Monitor is to report annually to the Minister on the performance and competitiveness of the retail electricity market in New South Wales for small customers, including on the following matters—
(a) the participation of small customers in the market and, if the Market Monitor thinks it appropriate, particular groups of small customers;
(b) prices of electricity for small customers in regional areas;
(c) any barriers to entry to or exit from, or expansion, in the market;
(d) the extent to which retailers are competing to attract and retain small customers;
(e) whether price movements and price and product diversity in the market are consistent with a competitive market;
(f) if the Market Monitor is of the opinion that it is required, steps necessary to improve the competitiveness of the market;
(g) whether there is a need for a detailed review of retail prices and profit margins in the market;
(h) any other matters the Market Monitor thinks appropriate.

As the Market Monitor, IPART is required to provide the relevant Minister with the annual report, which is then required to be tabled before both Houses of Parliament in NSW. To carry out its functions the Tribunal has broad powers to compel retailers to provide certain documented information, or to attend hearings to give evidence.

Effectiveness

IPART’s annual reports provide a comprehensive analysis of the retail market in NSW and often make recommendations to improve the operation of the market, particularly in relation to small customers.

While the reports are useful, the impact of any recommendations made by IPART is questionable. Any recommendations would need to be implemented by the NSW Parliament as further derogations to the National Energy Retail Law (NSW), or by the relevant NSW Minister submitting a rule change request to the Australian Energy Market Commission (AEMC) under s 243 of the National Energy Retail Law.

The NSW Minister did not adopt the sole recommendation from the previous annual report (aimed at prohibiting retailers from engaging in retention and win-back activities). However, the Minister did introduce a derogation to the National Energy Retail Rules related to charging disconnection fees to “vulnerable customers”. The introduction of a vulnerable customer derogation was not discussed in IPART’s previous annual report.

In fairness, the AEMC is currently consulting on proposed rule changes to address retention and win-back practices – making the utility of adopting the recommendation from the previous annual report questionable. As IPART noted in its reasons for recommending that the Market Monitor role be abolished:

We consider that we can relinquish our market monitoring role with minimum risk, as the same issues are being considered and addressed by other regulators.

Adopting the recommendation

It is likely that the NSW Parliament will adopt IPART’s latest recommendation that it be relinquished from its role as Market Monitor. The primary reason for this being the Australian Competition and Consumer Commission (ACCC) has recently been charged with an ongoing market monitoring role for the electricity market as a whole and will report every 6 months. This is in addition to the annual reports on the retail market developed by the AEMC and the Australian Energy Regulator. Any differences present in the NSW market compared to the national market are not significant enough to warrant dual market monitoring by separate regulators.

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