13 May 2011
RE: Victorian National Energy Customer Framework Discussion Papers
CitiPower and Powercor Australia (the Businesses) refer to the Department of Primary Industries' (DPI) National Energy Customer Framework (NECF) discussion papers released on 15 April 2011. These papers relate to:
- reform proposals for the Victorian energy licensing framework (Licensing Discussion Paper); and
- transition to NECF energy customer contracts (Contracts Discussion Paper).
(collectively the Discussion Papers).
The Businesses appreciate the opportunity to comment on the Discussion Papers and are supportive of DPI's initiatives in developing a Victorian framework to assist the industry to transition to the NECF by the implementation date, which is currently set for 1 July 2012.
With respect to the licensing framework, the Businesses submit the continuation of the current licensing regime would be the most effective option, given the current timeframe, and would facilitate a seamless transition to the NECF. The Businesses are supportive of a full review of the current Victorian distribution licences with a view to ultimately remove duplication of provisions and promote regulatory certainty.
The Businesses also consider that consistency across the national framework would be further promoted if regulatory oversight of the licences is transferred to the Australian Energy Market Operator (AEMO). This proposal is compatible with AEMO's current functions in regulating market participants under the National Electricity Rules (NER).
With respect to transition to NECF customer contracts, the Businesses highlight that a number of significant provisions that are currently in the Deemed Electricity Distribution Contract are not provided for in the NECF contracts. The Businesses submit that these provisions must be included in the NECF contracts to ensure rights and obligations are clear and comprehensive.
The Businesses acknowledge that a further consultation will be held by DPI regarding the implementing legislation, however, seek preliminary clarification from DPI as to the possible ways in which these additional provisions would be incorporated into the NECF contracts given the limitation on required and permitted alterations under the NERL.
With respect to the issues raised in the Discussion Papers, the Businesses make the following submissions for the DPI's consideration.
Licensing Discussion Paper
1. What should the basis of any limitation on entry to the distribution sector be?
The Businesses agree with the principle that the purpose of limiting entry to the energy sector is to protect customers' interests by ensuring that only technically competent and financially viable entities are able to distribute energy safely and reliably. Safe and reliable distribution of energy is of paramount importance to the way in which the Businesses operate.
Safe and reliable distribution of energy must also be cost effective and the Businesses note that energy networks exhibit declining average costs in a way which is not comparable to perfectly competitive markets. The existence of scale economies results in a market whereby fewer firms are able to produce more efficient price outcomes. The Businesses agree that the purpose of limiting entry into energy distribution is also to facilitate efficient planning processes.
Therefore, the Businesses submit that the best approach to ensuring safe, reliable and cost effective services in energy distribution, is to limit entry to only those entities who are financially viable and technically competent. The most pragmatic way for regulators to assess these entry criteria and to ensure ongoing commitment from entities to maintain their viability and competence, is to require entities to hold a form of licence, whether in the current form, or similar amended form.
A licensing regime would allow a regulatory authority to rigorously assess applications to ensure that the applicant is capable of meeting technical and financial demands, whilst protecting the integrity of the network to allow entities to deliver customers long term benefits from exploiting scale economies. While the Businesses agree that any organisation with the financial resources to purchase ownership of a distribution company will also have resources to ensure that it is run competently, it does not necessarily follow that distribution will be safe and reliable. Regulators require some form of recourse to ensure that such entities comply with relevant service standards and incentive schemes.
2. What kinds of network infrastructure should be exempted from such a limitation?
The Businesses submit that it is difficult to propose a category of entities or infrastructure that should be exempted from obtaining a licence, or other restrictive instrument. This is because all entities who distribute electricity should be subject to the same regulations and conditions to ensure consistency and fairness, not only in the way distribution businesses are treated, but also in the way in which customers are treated.
The Businesses submit that a customer should have the same rights against distribution companies regardless of where they choose to live. In these markets, customers are in a difficult position in that they will often face prohibitive transaction costs in switching service provider. Few customers would move their home in response to a network service provider who is not meeting service standards expected of the industry.
Therefore, the Businesses submit that exemptions should not be granted and that all network service providers are required to be licensed. While the Businesses recognise that past practice has been to grant exemptions to Embedded Network Operators (ENOs), too often the Businesses have witnessed long and protracted disputes between ENOs and customers, where customers have been unsure of their rights against the ENO.
See question 4 for further discussion.
3. What measure of competence should be satisfied by a business choosing to build some form of distribution infrastructure?
In order for distribution infrastructure to operate safely, it must meet all relevant Australian Standards and reflect good electricity industry practice within the meaning of Chapter 10 of the NER. This is not only important for customers, but also for other network service providers connecting new infrastructure.
The Businesses submit that additional measures of competence should closely follow the Essential Service Commission's (ESC) previous factors in considering applications for licences. These factors include assessment of:
- the organisational chart of key personnel in the entity with details of experience and knowledge of industry;
- contracts with external service providers, including customer and supply contracts and outsourcing arrangements;
- statements from industry bodies including EWOV and other regulators;
- internal controls and policies, business plans and risk management policies; and
- complaints register and procedures.
4. What impact will arise from the imposition of regulatory obligations on small scale network operators?
The Businesses recognise that many of the regulatory obligations can be onerous for small scale network operators. However, the Businesses submit that regulatory compliance is a cost of providing network infrastructure, and the inability of an entity to meet such costs should not negate the need for safe and reliable energy distribution.
While the ESC has released recommendations to impose further obligations on small network providers, it still does not afford the customer the rights they would have if they decided to take supply in a location serviced by one of the current licensees. The Businesses submit that the policy is arbitrary, and the obligations on small network providers are subject to variation making it difficult for customers to understand their rights and obligations.
5. Is there any reason why Victorian-specific cross-ownership restrictions are required in the energy sector after the commencement of the final national frameworks?
The Businesses submit that the Competition and Consumer Act 2010 (Cth) (CCA) provides a robust framework for assessing and preventing anticompetitive mergers and acquisitions. As such, the Victorian-specific cross-ownership restrictions set out in the Electricity Industry Act 2000 (Vic) (EIA) are no longer necessary, as any trade practices concerns which may arise in the energy sector can be adequately dealt with under the CCA.
Section 50 of the CCA prohibits acquisitions which would result in a substantial lessening of competition. This section is not limited to horizontal acquisitions or mergers, but also applies to vertical transactions. The Businesses submit that the Australian Competition and Consumer Commission (ACCC) has significant experience in assessing potential mergers, and has the ability to deal with cross-jurisdictional transactions as well as intra-jurisdictional transactions.
6. How might businesses that must exercise these statutory powers be identified in the absence of holding a licence?
The Businesses note that identifying network service providers in the absence of a licence will be a difficult issue. While distribution network service providers are defined under Chapter 10 of the NER, this definition may not sufficiently identify Victorian providers. A definition which requires identification of Victorian service providers is necessary because it is anticipated that Victorian businesses will be subject to unique Victorian specific regulations, such as the obligations under the EIA, the Electricity Safety Act 1998 (Vic) (ESA) and the Electricity Distribution Code (EDC).
The Businesses note that the way in which network service providers are currently defined is dependent on the holder of a distribution licence which defines the distribution area. The ESA, EIA and the EDC reference holders of an electricity distribution licence and therefore the Businesses submit that any new instrument will need to be cognisant of the legislative arrangements under the current licensing regime to ensure changes are seamlessly incorporated and a clear reference point is established to identify Victorian distributors and their distribution areas for the purposes of any obligations under Victorian specific legislation.
The Businesses support retention of the current licensing regime. While issues with respect to identifying Victorian distributors may be overcome, careful consideration of the consequential effects on other legislation is required and the Businesses submit that amendments to the definitions under the current regime are unnecessary for the implementation of the NECF. The Businesses acknowledge, however, that many of the provisions of the current licence will need to be reviewed, and are supportive of moves to remove duplication between the current licence and the NECF.
9. What is the appropriate basis for funding the cost of regulation if the licensing regime is ended or substantially modified to accommodate the national framework?
The Businesses have been supportive of the transition to the NECF, and submit that consistent with the transition, oversight of the licensing regime be transferred to the AEMO. The Businesses submit that AEMO are well placed to manage licensing given their role in registering market participants under Chapter 2 of the NER. Additionally, AEMO have existing funding arrangements in place, and the Businesses submit that the costs of licence administration can be managed under these arrangements. The Businesses note that licence fees would therefore no longer be required.
The Businesses acknowledge that the DPI cannot unilaterally impose functions on the AEMO without approval from the Ministerial Council on Energy (MCE). The approval process will require consensus among all MCE members and the Businesses note that this may take some time. However, given that the process for reform has begun, it would be advantageous to pursue and effect full transition to a national regulator at this point in time.
10. Are there any issues regarding NSW and SA distributors who supply customers in Victoria?
It is understood under current arrangements that Victorian customers are protected under Victorian law. Similar arrangements exist in New South Wales and South Australia. For example, a customer located in western Victoria supplied by an interstate distributor is a Powercor Australia customer.
Powercor Australia is responsible for ensuring that customer is supplied within the relevant regulatory requirements under Victorian law. It is therefore up to Powercor Australia to negotiate with the relevant interstate distributor to ensure customer supply meets the relevant Victorian regulatory requirements. Today this is achieved through use of system agreements negotiated between the networks. This situation does not need to change under NECF.
11. Are there any issues regarding Victorian distributors who supply customers in SA and NSW?
See question 10.
14. Do any implications arise from shifts from regulatory to statutory requirements?
The Businesses note the DPI's proposals for:
- An open system, whereby a licensing regime would no longer apply at a state level and a new regime will be arranged under a national framework;
- A move to statutes, whereby a form of authorisation similar to the retailer authorisation under the National Energy Retail Law (NERL) is established; and
- Inverted licensing, whereby small network operators are required to obtain licences, and large distribution companies apply for exemptions.
With respect to an open system, the Businesses submit that without any details regarding the scope covered by a new regime, the Businesses are unable to provide specific comment at this point in time. However, the Businesses note that any proposal for a national framework may result in a regulatory arrangement which seeks to reconcile differences across jurisdictions. Whether these differences will adversely impact the Businesses financial arrangements and debt instruments will depend on the degree to which the proposed regime differs from the current Victorian regime, and how receptive external stakeholders are of the changes.
With respect to a move to statutes, the Businesses seek clarification as to the basis on which the obligations will be drafted into state legislation. The Businesses are concerned that a transition to statute will compromise current arrangements and there is a potential risk that existing obligations will not be retained in their substantive form. Furthermore, given the time constraints in meeting the NECF implementation date, the Businesses are of the view that there is insufficient time to adequately consult with distribution businesses with respect to moving towards a statutory framework. The need for consultation will be more pressing the greater the differences between the current regime and the proposed regime.
With respect to inverted licensing, while the Businesses support the principle of requiring small network operators to be licensed, the problem of identifying distribution businesses would remain. See question 6 above for this issue of identification.
The main issue with respect to each of the proposals outlined above is that debt arrangements have been based on the existence of the licence and the defined distribution area. Should these arrangements materially change, there is the potential for these changes to have an adverse impact on the Businesses' debt arrangements and the ability of the Businesses to secure cost efficient funding in the future.
While the Businesses acknowledge that changes to the current regime may not result in a breach of their financing documents, there is nevertheless the risk that creditors and ratings agencies take a different view which could have an unintended negative impact on the certainty of the Businesses' financing arrangements.
The Businesses are therefore supportive of the proposal to continue the current licensing regime. The Businesses acknowledge and support moves to remove duplication between the current licence and the NECF, and are supportive of proposals to transfer oversight of the licensing regime to the AEMO.
15. Do any implications arise from the absence or replacement of a licensing regime?
See question 14 for discussion.
16. Are there relevant considerations for Government regarding the body that grants and revokes an energy authorisation? (e.g. the ESC, the AER, AEMO, the Minister for Energy or the Governor-in-Council?).
The Businesses submit that the most appropriate institution to undertake oversight of a licensing regime is AEMO. AEMO is an independent institution and the Businesses have confidence in AEMO's technical capacity and depth of experience in the industry. As previously mentioned, AEMO currently manage the registration of market participants under the NER and are experienced in reviewing the prudential requirements to be met by applicants. The Businesses submit that licences are administrative and consider oversight from the Minister or Governor-in-Council to be unnecessary.
17. Can national concepts of authorisation and registration under the NEL, NGL and NERL be relied upon to underpin Victorian statutory obligations and powers, or should nomination, registration and/or authorisation be performed under a Victorian scheme?
The Businesses submit that given the differences in licensing regimes across jurisdictions, it is likely that national concepts will significantly compromise the current licensing arrangements in Victoria. As mentioned previously, significant variations between the current regime and proposed national concepts will need to be thoroughly reviewed to determine whether there would be an adverse impact on debt instruments and financial arrangements for the Businesses. These issues are difficult to address and may ultimately have an impact on cost of capital going forward.
See also question 14 for further discussion.
18. On what basis might a person be granted (or refused) such authorisation?
The Businesses submit that the assessment criteria against which current licences are issued should remain. Section 19 of the EIA provides that the ESC must not grant a licence unless it is satisfied of the financial viability and technical capacity of the applicant to comply with the licence terms and conditions.
While s 19(3) of the EIA provides that the ESC does not have to be satisfied with the financial viability of an applicant if that applicant must comply with the prudential requirements under the NER, it is the ESC's practice to conduct its own form of financial viability assessment in any event. The Businesses propose that these additional obligations should also form part of any assessment of a licence application.
The following list illustrates some of the factors which the ESC takes into account in assessing financial viability of a licence applicant:
- whether the applicant will have access to sufficient financial capital;
- whether the applicant will be able to establish a sustainable business in order to satisfy interests of customers;
- type of licence sought;
- corporate structure of applicant;
- credit ratings;
- statements from internal and external auditors; and
- shareholder register.
For factors which the ESC considers in assessing the technical competence of a licence applicant, see question 3.
19. Are there material costs from the duplication of an authorisation function in the Victorian and national frameworks?
The Businesses are unclear as to why duplication of authorisation functions would be proposed, and seek clarification as to the scope of this proposal. The Businesses are unable to provide specific comment on the materiality of costs of duplication and reserve comment until details of the duplication of authorisation functions are confirmed.
However, the Businesses make the general submission that duplication of any regulation is inefficient. Parallel obligations in state and national frameworks create regulatory uncertainty. In addition, the creation of duplicated authorisation functions would defeat the purpose of the DPI's reform objective, namely, to reduce the regulatory burden.
20. What Victorian regulatory arrangements – that are not covered by the future national frameworks – require substantial regulatory oversight?
There are a number of provisions in the current Victorian licence which are not adequately covered in the NECF in any form. The Businesses note that a report from Allens Arthur Robinson containing a gap analysis of the NECF and current Victorian legislation may be released by DPI. The Businesses anticipate that this report will identify Victorian provisions which still require substantial regulatory oversight.
For the purposes of the Licensing Discussion paper, the Businesses submit that the following provisions of the current Victorian Distribution Licence may require ongoing regulatory oversight:
- Clause 5.2 of the Licence which requires that a licensee must adopt the provisions of the EDC in the deemed distribution contract;
- Clause 7.1 of the Licence which requires that a licensee must require the embedded generator to comply with the provisions of the EDC in the connection contract for embedded generators;
- Clause 8 of the Licence which sets out obligations on the licensee to offer undergrounding and similar services;
- Clause 9 of the Licence which sets out obligations on the licensee to offer to provide certain services to other distributors, including power transfer capabilities, reactive capacity, and metering;
- Clause 10 of the Licence which sets out obligations on the licensee to offer public lighting services;
- Clause 15 of the Licence which requires licensees issue unique NMIs for each metering installation; and
- Clause 20 of the Licence which requires licensee to cooperate with VENCorp (now AEMO) in the establishment of demand reduction procedures.
The Businesses submit that many of the provisions of the EDC, which customers and embedded generators are required to comply with, have not been substantively included in the NECF. The Businesses seek clarification as to how DPI proposes to accommodate these provisions under the transitional arrangements.
21. What is the most appropriate and effective enforcement regime for Victoria-specific regulatory arrangements?
With respect to Victorian specific regulations, such as service standards, the Businesses propose that DPI manage these issues under the new regime. The Businesses note that DPI currently determine service standards and functional specifications for the Advanced Metering Infrastructure program (AMI), and that this is the current practice in New South Wales and Queensland, where the Department of Water and Energy, and the Department of Employment, Economic Development and Innovation, are responsible for their respective state's service standards.
While the Businesses propose that Victorian specific regulations should be managed by DPI, the enforcement of such regulations should be managed by the AER. The Businesses note that the AER released its draft Statement of Approach and Procedures and Guidelines on 23 March 2011 which detailed how the AER will monitor compliance and enforce regulations under the NECF. The Businesses agree in principle with the general approach set out by the AER and reserve any further comments until the release of the final Statement.
22. When and where should customers have the right to take enforcement action?
The Businesses acknowledge that customers have the right to take enforcement action under the NECF with respect to small customer complaints. Under s 79 of the NERL, customers are entitled to lodge a complaint to the Ombudsman. These rights are similar to the rights of customers under the current Victorian EDC.
However, with respect to the issue of licensing in particular, the Businesses submit that providing customers with a right of action for such issues is no longer required. Rights of action under the current licence were provided to customers as an avenue of appeal for obligations licensees had directly to customers, for example the obligation to offer to connection services. Given that these obligations are now under the NER or the NERL, customers' rights of action would more appropriately fall under these instruments.
23. Which body is best placed to oversee Victoria-specific regulatory arrangements?
See questions 16 and 21.
24. Should Victoria reform small scale licensing activities in concert with the implementation of the NECF?
The Businesses note that the AER will be holding consultations with relevant stakeholders with respect to network service provider exemptions. The Businesses are supportive of DPI's initiatives to pursue reform of small scale licensing activities in concert with the AER.
25. What Victorian regulatory arrangements – that are no covered by the future national frameworks – require substantial regulatory oversight?
See question 20.
26. What impacts arise from abolishing licences if licensing arrangements are to be reformed?
See questions 6 and 14.
27. Are there any other transitional issues that DPI should be aware of?
In addition to items identified in question 20, the following regulations will also need to be addressed and/or confirmed under transitional jurisdictional legislation:
- Easements governed by Part 5 of the EIA;
- Service standards governed by the EDC;
- Planning standards governed by the EDC;
- ESC Guidelines, in particular Guideline 15 – Connection of Embedded Generators;
- Possible amendments to the EIA, the Essential Services Commission Act 2001 (Vic);
- Revocation of the Default Use of System Agreement; and
- Continued relevance of the Electricity Customer Metering Code and the Electricity Customer Transfer Code.
Contracts Discussion Paper
10. How should transition from electricity deemed distribution contracts to the NECF be treated?
The Businesses confirm the operation of ss 70 and 76 of the NERL which provides that deemed contracts will apply when:
- in the case of an existing connection at premises that are not energised – the customer's premises become re-energised; or
- * in the case of an existing connection at premises that are energised – the customer commences to take supply of energy at those premises. While the Businesses do not anticipate any substantial issues to arise from transition to NECF deemed electricity distribution contracts, the Businesses highlight that a number of provisions that are currently in the Deemed Electricity Distribution Contract are not provided for in the Deemed Standard Connection Contract under the NECF. The Businesses note that under s 69 of the NERL, deemed standard connection contracts must be adopted without alteration except as permitted or required. The Businesses are concerned that these provisions will not fall within the meaning of "permitted" or "required" alterations. These provisions include:
- provisions relating to the technical and operational issues outlined in clause 6 of the current CitiPower and Powercor Australia Deemed Electricity Distribution Contracts; and
- provisions requiring customers to comply with the EDC.
With respect to the technical and operational issues under clause 6 of the Deemed Electricity Distribution Contract, the Businesses submit that these provisions ensure that the tariffs assigned by the Businesses reflect the connection characteristics of each customer. The Businesses submit that these provisions support efficient and equitable pricing signals and limit cross subsidisation between customers.
The Businesses submit that these provisions are to be included in customer contracts under the NECF, and seek clarification from DPI as to the possible ways in which these provisions would be incorporated given the limitation on required and permitted alterations under the NERL.
12. How should individualised negotiated contracts be treated?
The Businesses advise that they have less than twenty individualised negotiated contracts currently in place. Each contract has a defined term of up to five years. The Businesses advise that these contracts will be continued until the expiry of each term. Upon expiry, new procedures for negotiated contracts will be followed in compliance with the NECF.
13. How should customers who are in the process of procuring new connections to premises be treated in the transition?
The Businesses agree with the DPI's proposal to allow the existing framework to apply to connection applications before the implementation date, and for Businesses to give effect to the NECF procedures for any new applications after the implementation date.