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Legislative Assembly for the ACT: 2000 Week 3 Hansard (7 March) . . Page.. 628 ..

MR STEFANIAK (continuing):

the past five years or so. The way that retailers buy their power has changed. The way that they sell their power to their customers has changed as well. Five years ago, ACTEW bought its electricity from interstate generators, basically Pacific Power and the Snowy, under stable arrangements that were dictated to it by the suppliers. It was clear that these arrangements did not favour the ACT. Five years ago, all ACT electricity users bought their power from ACTEW; there was no other option. Now, ACTEW buys its power on the open market under national electricity market arrangements. Generators from South Australia, Victoria and New South Wales bid power into a central pool and retailers such as ACTEW bid to purchase power from that pool.

The competitive market arrangements and the tough approach taken by regulators on the pricing and transportation of electricity have translated into far keener prices for the large and small customers that are most competitive. They are lower in real or relative terms than the prices charged before the reform process started. The problem is that the price of electricity from the pool varies enormously, depending on how much generation is available and how much power is required by retailers. The normal pool price is around $30 per megawatt hour, far lower than in previous supply regimes. But prices can vary by as much as $200 to $300 per megawatt hour in the space of just a few hours. Indeed, in extreme cases, the price could go to as high as $5,000 per megawatt hour.

Similarly, retailers can be at risk if, for whatever reason, their customers require more or less power for a particular period than was anticipated. All retailers need to guard themselves against the risk of unexpected high prices or changes in demand through a suite of hedging and insurance instruments. Such insurance costs money, something that falls particularly heavily on smaller players such as ACTEW. Price hedging arrangements, like all insurance, is a tricky, highly technical business. Already one generator, Pacific Power, has been badly burned by a hedging arrangement that it got wrong. The same could happen to a retailer.

There are several trends making the price hedging issue more and more complex. Prices in the national electricity market are gradually trending upwards, reflecting the generally tighter supply-demand situation, particularly in the southern States. Price volatility is becoming more marked. That was particularly so during the extreme climatic conditions experienced over the last month or so.

On the retailing front, ACTEW's monopoly on ACT electricity retailing ended two years ago. All customers using more than 160 megawatt hours per annum are now free to choose their own retailer, and around 18 retailers are competing for their custom. The customers with retailer choice are few in number, less than 1,000 compared with over 120,000 smaller customers, but the amount of electricity involved is quite significant. About half of the ACT's electricity is now contestable. The retailers which now compete with ACTEW in the ACT are, for the most part, large corporations.

The outcome of retail competition has been that retailers' margins all round Australia have been cut to the bone. Larger customers have been looking for cost savings and have generally found them. The message is out to all retailers that customers can and will change retailer if they can get a better deal. The next step in retail competition will be the extension of retailer choice to smaller customers - small business, community groups, domestic customers. For the ACT, we have envisaged that this process will start in

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