Dear Sir/Madam,

RE: Regulatory Arrangements to Support the Power Line Bushfire Safety Program

Please find attached the Submission on the Regulatory Arrangements to Support the Power Line Bushfire Safety Program, from the Electrical Trades Union of Victoria.

In summary, our preference is for regulatory requirements that apply the highest standards of transparency and accountability by the Victorian distribution companies, in their delivery of funded infrastructure.

This would appear to be necessary as a consequence of the ongoing ability, under AER regulation, for electrical distribution companies to spend less on maintenance than they have budgeted and been compensated for in electricity price rises.

Yours sincerely

Troy Gray
Assistant Secretary

Submission

In response to the questions for stakeholders, the ETU provides the following feedback

Question 1

In relation to the following elements

  • the rollout of new generation ACR's,
  • REFCLS (following a successful trial) and r
  • requirements for new power lines in high bushfire risk areas

The ETU supports ESV/DPI amend regulatory instruments to require transparency and accountability for funding provided.

The regulatory tools need to provide a stronger incentive than currently exists under AER regulation, which allow electricity distributors to receive more compensation from Victorian electricity users for maintenance, than is actually expensed.

The AER regulatory framework enabled SP Ausnet and Powercor to under-invest in operational maintenance in the 5 years leading up to the Black Saturday Fires.

Figure 1.2 Operating and maintenance expenditure by electricity DNSPs (difference from forecast)

Figure1.2 shows Operating and maintenance expenditure by electricity provider - figures can be found in table B.11

Table B.11 Operating & maintenance expenditure, difference between forecast and actual—per cent


1996-01 average 2002 2003 2004 2005 2006 2008 2009
Jemena 2.9 1.7 5.8 -0.2 2.8 -5.0 -17.4 -12.7
CitiPower -40.4 -39.2 -46.8 -15.7 -55.4 -18.1 -10.6 -17.2
Powercor -6.2 -23.8 -17.0 -7.4 0.0 -5.1 -13.3 -14.0
SP AusNet -9.6 -4.2 -3.8 -10.8 -17.5 -27.5 -7.2 0.3
United Energy -1.3 -10.7 -1.2 -0.5 -2.9 -2.2 -9.1 -3.9

The AER data indicates that under-investment in maintenance from existing revenue is an endemic and threatening dynamic for Victorians.

The cost of this underinvestment is indicated by the Bushfire Royal Commission's finding that the 'conservative cost' of the Black Saturday Bushfire is $4.4 billion

It is this lack of regulation to require actual expenditure to budget, or to seek claw back of unexpended revenue provided, which arguably was a major contributor to the lack of incentive for power distributors to deliver less maintenance.

The Victorian government¡¦s decision to further compensate the privately owned and highly profitable distributors, for their failure to maintain and upgrade infrastructure leading up to the Black Saturday bushfires appears illogical. The moral hazard created, whereby the incentive to maintain safe infrastructure within their own budget, decreases, rather than increases, increases the the risk of fire hazards.

It is also noted that the Power Line Bushfire Safety Taskforce included representation by the power companies who are in a position to profit from the outcome.

Any future regulation of service delivery for improved electrical distribution infrastructure safety, needs to remove the conflict of interest inherent in the electricity distributors being the major beneficiaries of the funding.

In summary, it can be seen that there needs to be extremely effective regulation and accountability mechanisms to require electricity distributors to meet any commitments they make on infrastructure investment or maintenance.

Question 2

Table 5.1 appears only to state that there is potential of duplication of funding, by Victorian electricity users and taxpayers, to undertake the necessary upgrades.

The Victorian government needs to establish its own position on what it is prepared to buy for the additional $200 million in taxpayer funds it is providing, and the revenue it is making available from higher electricity tariffs in rural Victoria.

The fact that there is duplication in funding arrangements with the AER also indicates that there is still a major grey area over:

Which of the Power Line Bushfire Safety Taskforce recommendations are:

  1. Requirements of a safe distribution infrastructure which should be funded through existing revenue / and or profits of the distribution companies, or
  2. Additional requirements established by the State government, that the State Government is taking responsibility for Victorian taxpayers to pay for separately

In short, Victorians are entitled to a much clearer understanding of what they are paying for and why.

The AER has not determined what the base funding or pass through cost entitlements of the

distributors are in the future.

This really needs to be clarified by the AER and not be determined on the basis of ¡¥views sought¡¦.

Question 3.

This question assumes that electricity prices should necessarily rise due to improvements in technologies, which the electricity distributors could be funding from existing internal revenue.

The electricity distributors are already funded for providing a safe level of service delivery and other performance measures. It is a cost benefit to them to improve performance and reduce faults.

It is not clear that the electricity companies should be additionally compensated to the degree anticipated by the Victorian government ¡V to deliver to performance standards expected of them.

As such it is not clear why the Victorian government is seeking to improve the opportunity for the electricity distributors to increase their revenue from Victorians.

Relatedly, it is not clear that the AER will provide additional compensation as a 'pass through' event with regulatory requirements. There are a number of criteria which need to be met. To date none of the electricity companies have been successful in proving that their additional costs from the Black Saturday Bushfire outcomes (which the Royal Commission found electricity distribution faults were responsible for 5 of the 11 major fires) meet pass through requirements.

One of the requirements is a 1% of total revenue. It would be disturbing if the government proposed expenditure above the 1 %, to enable the companies to achieve 'pass through' revenue, rather than fund from their existing revenue. This consultation paper and other information from DPI strongly indicate that this is a real and driving motivation.

Regulatory requirements should be established to protect Victorians from being gouged by electricity distribution companies and to ensure that they receive what they have paid for. The question about the use of regulation as a tool to improve the distributors¡¦ opportunity to receive additional revenue (unexpended and retained as profit) from Victorians, is disturbing.

The DPI's bias towards options that favour the distributors and not Victorian consumers, also indicates that the oversight of the regulatory compliance needs to be independent of the DPI.

Question 6.

One of the common means by which the distributors retain higher proportion of revenue than they budgeted for, is by reducing actual man hours on scheduled projects.

The distributors are extremely opaque about the number of employee and contractors and/or man hours spent on any of their activities.

The distributors have a history of receiving electricity price compensation escalation in respect of labour, as well as other costs. The distributors have been able to ¡¥maximise profit¡¦ by remunerating labour at less than the escalation amount they have been provided by the AER.

The only way to prevent an extension of this practice of this maximising own returns by retaining revenue provided for labour, is to explicitly monitor detailed plans.

Each program should contain a detailed budget and operational plan, detailing the number of employees &/or Contractors and Man hours delivered.


1 AER, Victorian Electricity Distribution Businesses, Comparative Performance Report for 2009, December 2010.

2 Ibid.

Page last updated: 09/06/17