Back to its monopoly origin

Privatisation has led to the replacement of a publicly owned and accountable energy industry monopoly by a private oligopoly. Under this regime energy prices have risen sharply and local influence over the operation of the industry has diminished. The situation is set to worsen if the proposed merger of AGL and Origin Energy is allowed by the Australian Competition and Consumer Council (ACCC). The two energy giants already dominate the retail energy market, supplying electricity and gas to over 900,000 small customers or 81 per cent of the small customer base in the State.

While there were nine electricity retailers operating in South Australia in 2005-06, most of these were small players. Four retailers had fewer than 2000 small customers each. The only significant rivals to AGL and Origin Energy were TRUenergy with around 118,000 small customers and EnergyAustralia with around 86,000. These small players would find it very difficult to survive if the AGL and Origin merger goes ahead.

* Too much retail power

The management of AGL and Origin face a dilemma in pursuing a merger. They want to build on their six-million-customer base and expand their interests in generation in Australia and New Zealand. The ACCC however, must be concerned that a merger will deliver too much retail power to AGL and Origin. To avoid this the ACCC will require AGL and Origin to deliver up to one million of their customers in South Australia and Victoria to other retailers. The most likely buyers for these customers are TRUenergy and EnergyAustralia - the only other major players in the South Australian retail market.
The share-market loves most mergers because they offer the prospect of a significant reduction in running costs and higher dividends to shareholders. In the wake of AGL/Origin merger speculation, AGL shares rose sharply. Origin shares eventually followed suit. The market might like what it sees in the merger but it may not get what it wants from the ACCC. AGL and Origin might see the sacrifice of customers as too great a price to pay for a merger. On the other hand a merged AGL and Origin might just have the market power to quickly regain lost customers and make inroads into the customer base of their
competitors. The merger has been met by criticism from a number of State Governments.
The South Australian Government has called on the Australian Competition and Consumer Council (ACCC) to protect customers from market dominance.

There is a bigger story to be told here. Privatisation is not delivering what its proponents promised it would. The advocates of the sale of ETSA may have lost the State election but they still fail to accept the folly of their actions. Nothing good has come from the privatisation of ETSA. Electricity prices skyrocketed and the benefits of competition for consumers have proven illusory for most. The dilemma for policymakers today is the same as it was for Liberal Premier Tom Playford in 1945. How do you make a privately run business respond to the public interest when its function is to operate in its shareholders' interests? Playford recognised that a privately run electricity industry would always put shareholder interests ahead of the public interest. He nationalised it. We might not ever go this far again but I predict we will have to exert greater direct influence over the industry in the near future. This will be necessary to ensure that the industry more aggressively adopts strategies that provide affordable `green' energy to all Australians.

Available at http://www.adelaidereview.com.au/issues_and_opinions.php