State-owned West Australian power provider Synergy has been handed a stinging rebuke by the independent energy umpire, which found the utility unlawfully gouged customers tens of millions of dollars.
In a decision described as "extraordinary" by a leading energy observer, the Electricity Review Board upheld allegations by WA's economic watchdog that Synergy used market power to artificially inflate its prices more than 11,000 times between 2016 and 2017.
The Economic Regulation Authority (ERA) claimed Synergy's actions wrongfully swelled the utility's revenues between $40 million and $102 million during the period.
It also claimed they allowed all other generators that provided electricity during those times to benefit as well, leading to overall extra costs to consumers of up to $192 million.
At the heart of the ERA's investigation was Synergy's use of gas contracts to set prices in the spot, or wholesale, electricity market in WA.
Under market rules, generators are required to offer their production at what's known as the short run marginal cost, which is supposed to encourage the lowest-cost bids.
The ERA alleged Synergy made thousands of artificially high bids using gas prices set in a long-term contract with the giant Gorgon project rather than the cheaper gas available at the time on the spot market.
Market dominance paved way for overcharging
Furthermore, the ERA claimed Synergy's dominance of the wholesale market, in which it provides about half of the generating capacity, allowed the company to get away with the overcharging.
Publishing its decision, the review board broadly supported the ERA's arguments, finding Synergy had acted unreasonably and without regard for the effects of its behaviour on consumers.
"The board is satisfied the conduct in question was 'profitable' because it likely had the effect of increasing the price at which sales were made, without increasing costs or significantly decreasing the amount of electricity sold," the ERB wrote in its decision.
"The respondent persisted in the conduct for a substantial period.
"The board is also satisfied that the respondent's conduct 'related to' market power because it inflated the input costs...without consideration of the impact of those changes on its profitability or the market and for a substantial period of time."
Synergy tried to stem losses from Gorgon contract: Expert
Ray Challen, a former director of the ERA and top energy advisor to the state, said the review board decision was a damning indictment of Synergy's actions.
Dr Challen said Synergy's actions appear to have been motivated by a desire to stem the losses from the massive Gorgon contract, which forced the utility to buy gas for about $6 a gigajoule at the time of the offending, but sell it for less.
"So those contracts that Synergy has were out of the money," Dr Challen said.
"And what Synergy tried to do was price its electricity to recover its cost of gas. There's a history to that.
"Back when gas prices were about $8 to 10 a gigajoule in Western Australia...Synergy had all the benefit of these legacy North West Shelf contracts at about $2.50 or $3.
"So, Synergy obviously had those real in-the-money contracts.
"But when the tide turned and Synergy found itself out of the money, they wanted to maintain their profitability by effectively exercising their market power to charge higher prices in the wholesale electricity market."
Some customers may have faced bill hikes of 10 per cent
Dr Challen said while household consumers might have been shielded from the full effects of the inflated prices by government-imposed tariff caps, other customers exposed to the deregulated market would have suffered.
He estimated those customers' power bills may have costed 10 per cent more than they otherwise would have.
Moreover, he said Synergy's actions undermined the integrity of the wholesale market, which was supposed to ensure consumers benefited from competition.
"This is actually an extraordinary decision," he said.
"In energy markets and the world of government-owned trading enterprises, it's a big deal.
"If this was the ACCC investigating a private energy company...this would be seriously big news."
Economic watchdog wanted quicker ruling
ERA chairman Steve Edwell welcomed the umpire's ruling but lamented the time it had taken to be made.
Mr Edwell noted Synergy's actions dated back to 2016, while the ERA wrapped up its investigation in 2019.
"A well-functioning wholesale market is essential to ensuring that Western Australian consumers in the South West Interconnected System have access to secure and affordable electricity," Mr Edwell said.
"Resolution of this matter has taken inordinate time and we now must move on with the challenging transformation to decarbonise the electricity system."
Synergy disappointed with decision
Synergy said it was disappointed with the review board's decision and signalled it may look to lodge an appeal.
"Synergy is disappointed with the outcome of the Economic Regulation Authority's application to the Electricity Review Board," a spokesman said.
"The issue deliberated by the ERB was related to a detailed interpretation of the market rules and the price of wholesale electricity.
"This decision will not impact the price of electricity for residential customers, which are set by the state government.
"Synergy is reviewing the ERB's reasons for its decision and considering next steps."
