Speak softly…

…and carry a big stick. The federal government have taken Teddy Roosevelt’s foreign policy dictum to heart (well the second part of it anyway) with last year’s “Big stick” legislation aimed at curbing abuse of market power by electricity companies. Now the ACCC have published their guidelines setting out how they will enforce the legislation, which technically goes by the more prosaic name of part XICA of the Competition and Consumer Act 2010.

Retailers and generators, who are the subject of the legislation, have been pushing the ACCC for the last few months to provide more clarity than is given in the legislation itself, so they know what they are allowed to do. The guidelines, which include a number of hypothetical case studies offer these businesses – and their customers – some insight into the application of the Act.

There are three types of behaviour by supply businesses that are the target of the act. For retailers, it is failing to reduce their prices to small customers when they experience “sustained and substantial” reductions in their costs. In the contract market it is failing to offer contracts on reasonable terms “for the purposes of lessening competition”. For generators operating in the wholesale spot market, it is bidding in a way that is fraudulent, dishonest or in bad faith or for the purposes of manipulating spot prices.

Enforcement remedies open to the ACCC where electricity companies contravene the Bill range from public warning notices to civil proceedings to recommending the Treasurer force the company to offer financial contracts or to sell off assets. The guidelines note that legal action is more likely when the Act is breached by a large company, and that divestment orders will not be used lightly.

There is still a good deal of ambiguity in how the Act will apply in specific circumstances. In the case of retail prices, neither “sustained” nor “substantial” are precisely defined, although the guidelines indicate that a four per cent cost reduction is substantial. The ACCC recognises that changing prices is costly for a retailer (and may be constrained by regulation), and so reductions do not have to be applied immediately – one case study allows that if a scheduled price reset is three months away, the retailer can wait until then.

In the contract market section, the ACCC acknowledges that there are a range of circumstances when a generator would not want to offer a contract, such as if it is about to go offline for maintenance. Also, that there are typically Board risk policies that avoid concentrating counterparty risk or dealing with a counterparty that is insufficiently creditworthy. In any case it is not enough to be failing to offer contracts, a breach also requires that this occur for the purpose of lessening competition. This section is only likely to apply where the counterparty is a competitor of the retail business of the generator’s owner.

Finally, the spot market bidding section. This has a lot of similarities to the existing rules that prohibit disorderly bidding, and it is not immediately clear what it adds to those rules, other than creating a double jeopardy for generators.

The law comes into force in less than a month’s time, June 10. On 1 July, there will be a raft of network tariff adjustments across the NEM (but not Victoria). On top of this there is a clear downward trend in future wholesale prices that has emerged in recent months. The ACCC will be watching retailer and generator actions very closely to see how they respond to these changes. If previous form is anything to go on, there will be a good deal of jawboning from ACCC chair Rod Sims in the first instance but this time he will have his legislative baseball bat behind his back.