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20 May 2011

Dear Raif

RE: Victorian Licensing Arrangements – Issues Paper

Jemena Electricity Networks (JEN) appreciates the opportunity to comment on the Department of Primary and Industries (DPI) issues papers relating to the future of licensing arrangements for energy businesses in Victoria.

The economic regulatory functions have been transferred from the Essential Services Commission Victoria (ESCV) to the Australian Energy Regulator (AER) under the 'economic' regulatory framework established in 2007 for electricity through amendments to the National Electricity Law. The National Energy Customer Framework (NECF) which provides a national framework for 'non-economic' regulation will be implemented before long in Victoria. Given the expected transfer of a majority of the ESC's remaining regulatory functions to the national framework, the DPI has issued an issues paper on the future of the Victorian licensing arrangements.

JEN's response covers the licensing and enforcement framework alternatives contemplated in the issues paper that are likely to impact the electricity distribution businesses.

In summary, our key messages are:

  • JEN's licence to operate its electricity distribution network forms the foundation of its business. It has a high commercial value that enables JEN to function in a stable and efficient manner in the long term interests of customers. Any arrangement that may replace it should provide the same value and certainty.
  • JEN's preferred licensing framework is for the continuation of a limited Victorian licensing regime for distribution businesses including statutory obligations for supporting Victorian-specific set of functions that are not covered by the NECF – such as AMI and feed-in tariff obligations.
  • JEN believes there is merit in ensuring a single regulator is responsible for all energy industry regulatory enforcement action in Victoria. Given JEN's preference for the continuation of the Victorian licensing regime, JEN supports the conferral of enforcement powers with the AER.
  • JEN considers the relevant body to grant and revoke licences of large companies (excluding retail business) should be the Victorian Minister for Energy based on the recommendations of ESCV or the AER.
  • JEN believes the AER is the body to develop and administer a licensing framework for intermediary distribution and reselling of electricity.

JEN's detailed response to the DPI's issues paper is set out in Attachment 1.

If you wish to discuss the submission, please contact me.

Yours sincerely

Siva Moorthy
Manager Network Regulation

Attachment 1: Jemena, Electricity Networks' Response to DPI consultation - Victorian Licensing Arrangements – Issues Paper

DPI's licensing framework alternatives

Section 6 of issues paper canvasses four main options (or a combination of the options) that may provide a suitable framework for the future of distribution licensing arrangements where the primary regulatory framework is national. They are:

  1. Open system (at State level), where no further authorisation or licensing requirement is imposed on the generation, transmission and distribution sectors at the State level, leaving this entirely to the national frameworks.
  2. Move to statutes, where authorisation becomes a matter of statutory nomination and obligations are spelled out in statutory frameworks.
  3. Continue licensing, where no change to the current licensing frameworks is made, but redundant regulatory arrangements are rescinded.
  4. Inverted licensing, where licensing requirements are 'inverted' to exempt major energy companies from licensing requirements, but subjecting small (currently exempt) entities to a requirement to obtain an appropriate licence.

JEN's response to the alternatives

Open system

The initial attraction of an open system is that jurisdictions will no longer have to deal with licensing and will be the least costly option in terms of regulatory burden. However, the DPI notes that under this arrangement it would be more difficult to identify electricity distribution businesses for the purposes of access to statutory powers in the Electricity Industry Act (EIA) - powers that are necessary for distribution businesses to acquire easements and enter lands to undertake distribution activities.

These powers would have to be provided by some form of registration or nomination under the EIA, which the DPI paper concedes is more akin to the option of moving to statutes. JEN considers it makes sense to transfer authorisation and registration functions of retailer businesses to a national framework because they operate nationally. But that national concept does not necessarily apply to network businesses because each licensed business operates within jurisdictional boundaries, and State and Territory governments may wish to retain control of the entry criteria governing standard and quality of the network businesses in their jurisdiction.

For these reasons, JEN considers an open system will not be appropriate for distribution businesses.

Move to statutes

The option of moving to statutes will abolish the licensing-based regulatory framework and re-establish the relevant regulatory obligations that are currently enforced by the licence through statutes or as Victorian-specific Rules under JEN is not convinced that this option will yield these benefits when compared to the current licensing regime minus the redundant regulatory obligations which are already duplicated in the NECF. Additionally, it believes there is a risk that the new statues that are necessary to supplant the functions of the existing licensing regime may inadvertently introduce uncertainties.

JEN has not seen these new legislations and is unsure whether they will adequately re-establish the relevant access to statutory powers and regulatory obligations. These matters are of a permanent nature and should not need revision.

Continue licensing

JEN believes the best way forward would be to continue with the current licensing framework with the regulatory arrangements the NECF make redundant rescinded. When these duplications are removed, the licence becomes a very simple legal instrument requiring minimal administration. All that would remain in the licence are: matters of granting and revocation of licences; compliance with the law; variations; role of an administrator if appointed; transfer of licence; licence fee; communications; definitions and interpretations; and a schedule defining the boundaries of the franchised distribution areas. Most important, there should be no energy retail rules in the licence. Should there be a need to impose Victorian specific regulatory obligations, it should be done via an Order-in-Council and not through a licence.

JEN considers the relevant body to grant and revoke licences of large companies (excluding retail business) in Victoria should be the jurisdictional Minister for Energy based on the recommendations of ESCV or the AER. That way, the Government will have control over the entry criteria for new entrants; the ultimate power to force exit of network businesses for a serious breach of licence obligations; and appointment of administrators.

The simplified licence will:

  • enable JEN to retain the high commercial value of a licence that enables JEN to function in a stable and efficient manner in the long term interests of customers;
  • provide distribution companies with a means of access to statutory powers that are in the EIA necessary for making and acquiring easements and entering lands to perform distribution activities;
  • limit the entry to qualified companies, ensuring they meet the entry tests provided in the EIA;
  • limit distributing energy to the franchised distribution areas defined in their licence;
  • provide for transferring of licence and change of business name; and
  • provide for exit of a distributor from the energy sector (although in practice licence revocation has never been used to force exit).

The licence is a material asset recognised in balance sheet of JEN and reflected in the audited financial statements. The licence is assumed to have an indefinite life and their value reflects the significant future cash flows expected to flow to JEN. Any material change in the net assets would likely have a flow on impact to the existing arrangements with external stakeholders including financiers.

The issues paper notes that that the option of continuing with a licensing regime involves minimal changes to current arrangements. JEN agrees with the DPI's observation. The ongoing administration cost of the simplified licences would be immaterial - in most case only dealing with transfer of licences and name change.

Furthermore, the DPI considers that there will be a need to continue the imposition of certain statutory obligations on network businesses once the NECF is implemented. These would include:

  • Feed-in tariff obligations; and
  • AMI obligations.

JEN concurs with the DPI's assessment that these provisions are integral parts of the overall Victorian energy regulatory framework.

Limiting entry to competent companies to distribute energy - that is, they meet entry tests provided in the EIA - will ensure customers' interests are protected.

For all the above reasons, JEN supports the continuation with the licensing framework for large distribution companies.

Inverted licensing

An inverted licensing arrangement contemplates exempting major energy companies from licensing requirements but subjecting (currently exempt) small entities to a requirement to obtain an appropriate licence.

There are implications for the Victorian Government for doing away with licences for major energy companies. Under this option the Government will not have the ultimate means of forcing exit from the energy sector of large energy companies for unacceptable behaviour. A threat of withdrawal of licence exists for retailers under the NECF. JEN appreciates the certainty of a distribution licence and the entry tests and checks to the energy sector.

As discussed above, JEN prefers the option of continuation of the current licensing arrangement for major energy companies on the basis that it is the simplest option involving minimal change and greater certainty. Absence or replacement of a licensing regime has commercial implications for JEN and other Victorian distributors, as outlined above. JEN strongly believes that any new arrangement that may replace the current Victorian licensing regime should provide the same commercial value and certainty that the current licences provide.

JEN believes the AER is the logical body to develop a licensing framework for small scale electricity selling and distribution activities. The AER is currently developing exempt selling guideline1. The guideline aims to set out classes of deemed and registrable exemptions. A similar licensing framework with appropriate conditions incorporating deemed and registrable exemptions should be adopted for small scale distribution networks.

The ESCV's final recommendations2 on small scale licensing framework made a number of recommendations. These were noted in the DPI's issues paper. JEN supports the DPI's suggestion that that it would be timely to include these recommendations (updated to reflect NECF) in a framework that applies to small scale network operators.

It is noteworthy the ESCV recommended intermediary distribution and reselling of electricity should continue to be exempted from the requirement to hold licence and that these exempt entities should be required to register their activities. The ESCV's recommendation for registration aligns with the AER's approach to exempt selling - that is, an approach incorporating deemed and registrable exemptions.

Unlike large scale distribution companies which operate in a franchised distribution areas under licence, exempt network operators operate nationally - for example, shopping centre complexes, retirement villages. Given this situation, it would be administratively efficient to have a national licensing framework for small scale operators.

Under a national licensing framework, the AER would be the appropriate body to administer small scale licensing activities.

Enforcement under a reformed framework

On the assumption that there will be some Victorian-specific regulatory arrangements continuing under the NECF, DPI's preference is to have a single regulator responsible for all energy industry regulatory enforcement action in Victoria noting:

'Each of these options may be a viable course of action, but at the outset there appear to be substantial advantages in ensuring that a single regulator is responsible for all energy industry regulatory enforcement action in Victoria, favouring options 2 and 4.'

JEN concurs with the DPI's enforcement approach. Given JEN's preference for the continuation of the Victorian licensing regime, JEN supports option 2 - which is maintenance of Victorian licensing, but conferral of enforcement powers with the AER.

1 Australian Energy Regulator, Draft for preliminary consultation, Exempt selling guideline, December 2010
2 Essential Services Commission of Victoria, Small scale licensing framework, Final recommendations, March 2007

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