To benefit the WA community by promoting an efficient and customer focused economy 1

Bruce Layman

Chief Economist

Economic Regulation Authority

To benefit the WA community by promoting an efficient and customer focused economy 2

WEM Market Rule 7A.2.17

a Market Participant must not, for any Trading Interval, offer

prices in its Balancing Submission in excess of the Market

Participant’s reasonable expectation of the short run

marginal cost of generating the relevant electricity by the

Balancing Facility, when such behaviour relates to market

power.

To benefit the WA community by promoting an efficient and customer focused economy 3

Market Power Mitigation in the WEM

• Consumer and Competition Law

• Electricity Market Regulation – Why?

• US Experience

• Market Rule 7A.2.17

• Proposed Changes

To benefit the WA community by promoting an efficient and customer focused economy 4

Competition and Consumer Act (2010)

• s46: Misuse of Market Power

• s50: Mergers

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Differences

• CCA 2010

• Protecting competition

• Electricity Markets

• Reduce participants using market power –e.g. withholding

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Competition and Consumer Act

• Substantial Market Power

• Ability to price without constraint from

competition

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Competition and Consumer Act

• Substantial Market Power

• Not transient

• Potential competition/ new entrants relevant

• Two years [AGL v ACCC]

• LRMC

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S46: Competition and Consumer Act (2010)

• Take Advantage of

• Whether a “profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the behaviour” [ACCC v Cement Australia Pty Ltd ]

• Effects Test

To benefit the WA community by promoting an efficient and customer focused economy 9

Electricity Markets

• Inelastic Demand

• Demand = Supply – always

• Short-term damage substantial

with long-term implications

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To benefit the WA community by promoting an efficient and customer focused economy 10

California Electricity Prices

17 Months

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Electricity Markets

• Inelastic Demand

• Demand = Supply

• Short-term damage substantial

• Capacity markets

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North America

• Structural (e.g. PJM)

• Conduct and Impact (e.g. MISO, NYISO)

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WEM Market Rule 7A.2.17a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power.

To benefit the WA community by promoting an efficient and customer focused economy 14

Rule 7A.2.17 Interpretation

• CCA 2010

• Interpretation Act (WA)

• Market Objectives

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WEM Objectives• Economic efficiency, safe and reliable

electricity production

• Encourage competition

• Avoid discrimination between technologies

• Minimise long-term cost to customers

• Encourage energy efficiency

To benefit the WA community by promoting an efficient and customer focused economy 16

WEM Objectives• Economic efficiency, safe and reliable

electricity production

• Encourage competition

• Avoid discrimination between technologies

• Minimise long-term cost to customers

• Encourage energy efficiency

To benefit the WA community by promoting an efficient and customer focused economy 17

WEM Market Rule 7A.2.17a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power.

To benefit the WA community by promoting an efficient and customer focused economy 18

Market Power• No “Substantial”

• Rule capable of being applied to any Trading Interval

• Refers to SRMC

• Rule can’t be toothless

• Other capacity markets

i.e. Short-term/transient covered

To benefit the WA community by promoting an efficient and customer focused economy 19

WEM Market Rule 7A.2.17a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power.

40.00

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Marginal Cost Average Cost

$ / MWh

To benefit the WA community by promoting an efficient and customer focused economy 20

Short-run Marginal Cost: Economics Textbook

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Marginal Cost Average Cost

$/MWh

To benefit the WA community by promoting an efficient and customer focused economy 21

Short-run Marginal Cost: Electricity Generation

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Short-run Marginal Cost

• SRMC ~ AVC; or

• P > SRMC may not relate to

market power

To benefit the WA community by promoting an efficient and customer focused economy 23

WEM Market Rule 7A.2.17a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power.

To benefit the WA community by promoting an efficient and customer focused economy 24

Capacity Market

• Proposed steep demand curve

To benefit the WA community by promoting an efficient and customer focused economy 25

Questions / comments?