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Additional comments
from Coalition Members of the Committee
1.1
Coalition
members of the committee are pleased that the majority report has recognised
that the electricity sector does have a range of legitimate concerns in
relation to the newly proposed regime under this legislation for
over-the-counter (OTC) derivatives trading.
1.2
The Coalition
is strongly supportive of an over-the-counter derivatives market.
1.3
We recognise
that the new regime will increase transparency of OTC derivative markets and
improve risk management practices. It will also give regulators and market
participants access to valuable data. Standardised OTC derivatives do have the
potential to reduce counterparty risk associated with OTC derivative
transactions.
1.4
Coalition
members of the Committee are however critical of the process.
1.5
The concerns
raised by the electricity sector should have been dealt with much earlier
through a properly responsive consultation process by the government.
1.6
Whilst the
electricity generation sector raised their concerns during the consultation
process, they were completely ignored by Treasury and by the executive
government as a whole. No weight was given to entirely reasonable and well
founded representations about the implications for the electricity sector in
general and ultimately the cost of electricity for consumers and business in
particular. Even government members of this Committee had to effectively
recognise that the government had erred in not taking those concerns on board.
1.7
For example,
the National Generators Forum (NGF) stated:
The draft
legislation we commented on and that the industry provided significant comment
on raised a number of concerns. That draft legislation has not been altered for
its introduction which is a concern and we are continuing those discussions now
with members of parliament.[1]
1.8
Both the NGF
and the Electricity Supply Association of Australia (ESAA) also pointed out
that the Bill was addressing problems that are not present in the Australian
OTC electricity derivatives market. In particular ESAA noted that the existing
Australian OTC electricity derivatives market substantially differed from international
markets targeted by the G20 initiated regulatory changes:
The first
of those reasons is that the (National Electricity Market) NEM is a mandatory
gross market. That means that all electricity on the grid has to be sold and
bought through the market mechanism that is controlled by the Australian Energy
Market Operator. Many other markets around the world are net markets in which
participants can trade bilaterally with each other and then simply settle any
unders and overs through the spot market as they wish to. As a consequence,
much of the selling of electricity and buying on the other hand can be done at
a fixed price and with the kinds of non-standard that we need to use the OTC
market for, so they would not be captured by this type of legislation, because
there is no need to have derivatives involved because of the direct nature of
the transaction.
The other
reason is that the NEM is an energy-only market, as Mr Everett has already
pointed out. The consequence of that is that, for an energy-only market, it is
particularly important that prices are allowed to rise and fall with as little
constraint as possible. In particular, without occasional very high prices, you
lack both the signals for new investment and the possibility for
generators—which are very capital intensive—to recover their long-term costs.
So the consequence of that is that prices are allowed to move between minus
$1,000 per megawatt hour and up to $12,900 per megawatt hour. By comparison,
the average is about $50 to $60, so it is a very significant multiple. In fact,
the NEM may be the most volatile commodity market in the world. That puts a
very significant premium on being able to manage the risks of the spot market.[2]
1.9
The NGF also
pointed out the highly competitive nature of the Australian electricity sector:
We have
perhaps the most competitive wholesale market in the world. When you look at
European markets and the domination by a number of players there, we do not
have that same domination. In Australia we have a multiplicity of participants.
If we look at generation in particular, we have government owned ones in a
number of different states, we have private ones and we have renewables. If you
go back to the start of the market, the price for generation was about $45 per
megawatt hour. That was without carbon. So if you take it to a current
without-carbon equivalent, we are about $40. So the price is actually lower,
and that is in nominal terms, ignoring all the inflation impacts over that
time. So we have an incredibly competitive market.[3]
1.10
The NGF also
noted there was no underlying need to increase regulation of the existing OTC
electricity derivatives market:
To our
knowledge, there is no evidence that the OTC electricity derivative markets in
Australia pose any risk or material concern to national or global financial
stability. [4]
1.11
The NGF
highlighted the potential costs of the new regulatory regime for the
electricity generation sector:
There are
a couple of elements to costs that would be introduced by the regulation if it
captured energy derivatives. One would be increasing compliance complexity....The
second element of costs is around that collateral cost and the fact that it
impairs what would otherwise be good risk management decisions.[5]
We are
concerned about there being an additional cost at a time when we are looking at
electricity prices increasing by another 40 per cent over the next five years;
we are concerned that this may flow through to an additional price increase on
top of that.[6]
1.12
The NGF
proposed a carve-out of the electricity sector from the provisions of the Bill.
1.13
The ESAA
argued for special recognition of the sector’s unique nature:
...our
view would be that it would be useful if the legislation was able to make some
explicit reference to the integrated nature of the physical and derivatives
market in the case of electricity. In fact, that has been recognised in the
courts from time to time where we included a quote from Justice French to that
effect in at least one of our submissions to this process. Ways to do that
might include that in the case of any regulations affecting electricity
derivatives to perhaps specifically include the energy minister as chair of the
Standing Council of Energy and Resources—which comprises the energy ministers
of all the states and territories, as well as the Commonwealth—in the
decision-making process. Also, to specifically name some of the expert energy
market bodies, such as the Australian Energy Market Commission, as being either
part of the decision-making process or at least part of the consultation
process. So I think if some recognition of the importance of understanding the
electricity market in evaluating the electricity derivatives market could be
embedded in the bill then, whilst we would consider that a second-best outcome
compared to outright exemption, that would go some way to addressing some of
our concerns.[7]
1.14
Coalition
members are pleased that the government members of the committee have at least
gone some way in recognising the real concerns of the electricity sector and
adopted at least part of ESAA’s proposed approach in recommending a requirement
that for matters relating to the energy sector the Minister for Resources and
Energy be consulted prior to the making of regulations, the mandating of
derivatives or consenting to an ASIC rule.
1.15
This
requirement to consult the Minister for Resources and Energy should be formally
enshrined in the legislation.
1.16
Coalition
members of the committee, whilst supporting the majority report and the bill as
a whole, remain concerned about the potential impact on the electricity sector
and ultimately electricity consumers if not properly addressed.
1.17
Given that
Treasury stated that the government has no plans to regulate OTC derivatives in
the electricity sector, the current Bill is equivalent to calling the ambulance
before you get sick just in case. The argument put by the electricity sector
that if there are no plans by government to regulate OTC derivates in the
electricity market[8]
using the provisions in this Bill why the government would not consent to a
carve-out of the electricity sector from the scope of this Bill. In particular
given the potential implications it has for the cost of electricity.
1.18
We do
recommend that the government more seriously consider the impact of this
legislation on the electricity sector and ultimately the cost of electricity
than it has so far. The government should consider the option of a full carve
out of the electricity sector from these new provisions.
| Senator
Sue Boyce |
Senator Mathias
Cormann |
| |
|
| Paul
Fletcher MP |
Tony Smith MP |
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