Class of 2020

In an Australian first, law firm Piper Alderman has announced it is launching a class action against the two largest generation businesses in Queensland. Intriguingly these are the government owned businesses Stanwell and CS energy. The case will only proceed if enough claimants sign up, but since every home and business in Queensland is a potential claimant and it costs nothing to sign up, this seems likely to be achieved.

The basis of the case is that Stanwell and CS Energy “gamed” the spot market to drive up prices over the period 2013-19 leading to Queensland energy consumers paying more than necessary. This claim plays into an issue that has dogged the NEM since market start – when is strategic bidding OK and when is it unfair and anti-competitive.

In principle, a perfectly competitive electricity market would see all generators bid at their short-run marginal cost (SRMC), on the basis that a price even $1 above that would be worth their while. The designers of the NEM were clear that some strategic bidding – essentially bidding above SRMC – was necessary in an energy-only market. Generators are capital intensive, and they would not be viable if they weren’t able to recover their capital costs and fixed operational costs as well as their short-run (mostly fuel) costs. They were also clear that rebidding right up to the start of the dispatch interval would make the market more efficient as it could respond to ate changes in the supply-demand balance. The AEMC reaffirmed this in its rejection of a proposed new rule in 2013 to constrain bidding by certain large generators.

Conversely the market design also creates opportunities for generation businesses if they have a dominant position in their region. Following a reshuffling of assets in 2011 that saw the government owned businesses trimmed from three to two, Stanwell and CS energy between them have over a 70 per cent market share in Queensland. The businesses have been dogged by suspicion and accusations that they have leveraged that market share to bid unfairly and drive the price up. The class action references analysis by Queensland Productivity Commission, the ACCC, the AER and the Grattan Institute in support of its claim.

Notably, though, the AER and ACCC have not launched their own action against Stanwell and CS energy over this period. Back in 2011, the AER lost a court case against a generator (yes, it was Stanwell again…) for failure to bid in good faith. Part of the issue then was the difficulty of proving that Stanwell’s traders did not intend to honour their bids at the time they were made. Subsequent changes to the bidding in good faith rules have sought to tighten them up to make it easier to prosecute an apparent breach. In this case, Piper Alderman are alleging a contravention of section 46 of the Competition and Consumer Act 2010 which prevents the misuse of market power rather than alleging a lack of good faith in bidding. This route is of course open to the AER/ACCC too. It’s not clear whether Piper Alderman and their litigation funder believer they have better evidence than the regulator or are simply more optimistic. Or that they are better placed to force a settlement rather than go all the way to a court judgment.

The case throws into sharp relief the issues around government ownership of energy assets. There are often claims made of the superiority of government ownership, usually based on the idea that such businesses will be more benign and customer-oriented because their government shareholder tells them to. Some arguments present ownership of such assets as more or less risk free (noting energy is an essential service) and that accordingly either they can be funded entirely with cheap government debt or that the state can enjoy easy profits rather than these flowing to private shareholders. This case calls both these claims into question.

If this case is successful, Queensland may have to rethink its enthusiasm for state dominance of the electricity generation sector. This has continued with the inception of CleanCo to own and operate a renewable portfolio in order to assist Queensland in meeting its renewable energy targets.

One party that will be watching with nervousness is the Tasmanian state government. They own Hydro Tasmania, the only generator in the NEM that is more dominant than Stanwell and CS energy. However, a key difference is that Tasmania has set up a framework of price- regulated wholesale contracts to protect Tasmanian users from the risks that might otherwise arise from this dominance.