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Kerry Schott calls out AGL Energy's market power under NEG

Kerry Schott calls out AGL Energy's market power under NEG

Regulatory risks around AGL Energy have intensified after Energy Security Board chairman Kerry Schott highlighted concerns the utility would have too much market power in South Australia under the proposed National Energy Guarantee system.

Ms Schott said effective competition was a prerequisite for the NEG to work. She said that while there was enough competition in most states, a "careful" approach would be needed in South Australia because the electricity supply sector there was dominated by one company: AGL.

The market power of all three major electricity suppliers – AGL, Origin Energy and EnergyAustralia – is an issue of which the ESB is "well aware," Ms Schott said on a stakeholder webinar on Friday, adding it would be discussed at the Council of Australian Governments meeting to consider the NEG.

But she singled out AGL's dominance in South Australia in particular.

"We'll be looking at in due course," she said, noting the ESB had a lot more work under way on the NEG mechanism, which has been adopted by the Coalition but has not got the backing of Labor or state governments.

JPMorgan energy analyst Mark Busuttil has also suggested the NEG policy would provide additional power to the major combined generator-retailers, notably AGL and Origin. He said the NEG would encourage retailers to own generation assets.

But an AGL spokesman pointed to findings by the Australian Energy Market Commission that retail markets with the highest level of vertical integration were the most competitive, and research by Frontier Economics that power producers that own retail operations behave more competitively than stand-alone generators.

"We are happy to work with the Energy Security Board to address any concerns it has but believe increased electricity supply rather than increased regulation is the best way to ease cost pressure on customers," the spokesman said.

The NEG, intended to address the "trilemma" of reliability, affordability and sustainability of energy supply, places an obligation on electricity retailers to source minimum levels of power from dispatchable sources, with supplies also to be in line with Australia's Paris commitments to cut carbon emissions.

AGL, one of the country's biggest electricity and gas retailers and the largest coal-fired generator, is at the same time under political fire over its intention to close its ageing Liddell coal-fired power station in NSW. It is also among the retailers forced down to Canberra in recent months to be grilled on customer discounting practices.

Ms Schott's comments also come as risks are rising in Victoria and Queensland that governments will intervene to regulate or control retail prices to try to rein in prices.

The surge in AGL's share price, to a record $28.44 in April, was brought to a halt by worries about mounting regulatory risks. The shares closed at $25.30 on Friday.

In Queensland, where AGL has a major retail presence, the Palaszczuk government has charged the Queensland Competition Authority to monitor retailers' pricing on a quarterly basis and has reserved the right to intervene if necessary. The QCA is studying the bills paid by households in the deregulated market in the state's south-east, where price controls were scrapped in mid-2016, and comparing them with the regulated market in regional and rural areas.

The direction from Queensland Energy Minister Mark Bailey to the QCA declares that the purpose of the work is "to give customers better visibility and hold retailers to account for their pricing practices".

The QCA is due to respond to the ministerial order by November 24, the day before the state election, with a report due on November 27.

RBC Capital Markets utilities analyst Paul Johnston said he saw the move as "further evidence of regulatory and policy risk, particularly for retailers with the state government [retaining] an ability to intervene and potentially reregulate retail energy prices".

He suggested that if the comparisons show a large divergence in prices, in particular with standing offers, "this may lead to further intervention in the market".

"This will also depend on the outcome of the state election with intervention of this nature considered more likely by the incumbent Labor government versus an LNP-led government," Mr Johnston said.

Meanwhile the Victorian government is due to respond this month to recommendations in the Thwaites review on a potential reregulation of retail energy prices. Mr Johnston said he saw it "more likely than not" that the government would follow the recommendation and said RBC had "a cautious view" on AGL as a result.

Financial Review

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