1. Introduction
    1.1 DPI's approach
    1.2 Making submissions
  2. The regulatory framework today
    2.1 Regulatory roles
    2.1.1 ESC Role
    2.1.2 DPI Role
    2.1.3 Australian Energy Market Operator (AEMO) Role
    2.1.4 AER Role
    2.1.5 ESV Role
    2.2 Objectives and functions of the licensing regime
    2.2.1 Limiting entry to the energy sector
    2.2.2 Imposing regulatory obligations on licensed businesses
    2.2.3 Imposing statutory obligations on licensed businesses
    2.2.4 Prohibiting cross-ownership between licensed businesses of different types
    2.2.5 Identifying energy businesses for the purposes of statutory powers of energy businesses.
    2.2.6 Requiring exit from the energy sector (revocation)
    2.2.7 Funding regulatory activities
  3. Future of distribution licensing arrangements
    3.1 Will there be substantial regulatory functions remaining in Victoria?
    3.1.1 Limiting entry to the energy sector
    3.1.2 Imposing regulatory obligations on licensed distribution businesses
    3.1.3 Imposing statutory obligations on licensed distribution businesses
    3.1.4 Prohibiting cross-ownership between licensed distribution businesses of different types.
    3.1.5 Identifying energy businesses for the purposes of statutory powers of distribution businesses.
    3.1.6 Requiring exit from the distribution sector
    3.1.7 Funding regulatory activities related to distribution
    3.2 Cross-border& miscellaneous issues
    3.2.1 Cross border issues
  4. Future of electricity generation licensing arrangements
    4.1.1 Limiting entry to the generation sector
    4.1.2 Imposing regulatory and statutory obligations on licensed electricity generation businesses.
    4.1.3 Prohibiting cross-ownership between licensed businesses of different types
    4.1.4 Identifying generators for the purposes of statutory powers of energy businesses
    4.1.5 Requiring exit from the generation sector
    4.1.6 Funding regulatory activities related to generation
  5. Future of transmission and trading licensing arrangements
    5.1 Transmission
    5.2 Traders
  6. Determining the policy response
    6.1 What are the alternatives?
    6.1.1 Open system
    6.1.2 Continue licensing
    6.1.3 Move to statutes
    6.1.4 'Inverted' licensing arrangements
    6.2 What is the efficient way forward?
    6.2.1 Assessment framework
    6.2.2 Changes required to implement reforms
    6.2.3 Enforcement under a reformed framework
  7. Transitional arrangements
  8. Conclusion

Appendix – Regulatory instruments under licensing framework

1 Introduction

Victoria currently administers a licensing regime for energy businesses in the electricity and gas sectors. Licensed businesses include electricity generators, transmission companies, distributors and retailers and gas distributors and retailers.

The licensing regime for electricity was introduced in 1994 as part of the reforms of the State's energy sector1 and overseen by the Office of the Regulator General (ORG), although licences were reviewed and substantially amended by the ORG's successor, the Essential Services Commission (ESC), in 2001 to accompany the introduction of full retail contestability (FRC).

The form of Victoria's licensing framework is understood to be largely derived from that adopted in the United Kingdom during its earlier deregulation and privatisation, but supplemented by a more detailed statutory framework which set boundaries on the regulator's discretion in order to create confidence and certainty for the privatisation process. Licensing regimes of varying types have been adopted by other Australian States and Territories, although the nature of these differ markedly in the amount of regulatory discretion that may be applied in determining licence conditions, and in some instances the administrative arrangements incorporate a split between the body issuing the licence and that determining the conditions.

As discussed in more detail later in this paper, the licensing system in Victoria (and its interstate counterparts) was originally the primary mechanism by which an economic and consumer regulatory framework was developed, imposed, and enforced upon the newly commercialised energy sector following the disaggregation of the State Electricity Commission and Gas & Fuel Corporation in the mid-1990s.

However, since the COAG energy market review in 2001-022 there has been a concerted move toward a statutory framework of national energy Laws together with Rules which are made by an independent national rule maker (the Australian Energy Market Commission (AEMC)) as agreed by the Council of Australian Governments (COAG) in the Australian Energy Market Agreement (AEMA). This framework is embodied in the National Electricity Law (NEL) and National Gas Law (NGL), which are applied as laws of Victoria under the National Electricity (Victoria) Act 2005 and National Gas (Victoria) Act 2008.

The statutory framework under the NEL and NGL has gradually subsumed many of the regulatory roles formerly performed by the Victorian regulatory framework, most notably by providing for the economic regulation of distribution networks since 2006 in electricity and 2009 in gas, and enshrining the status of the transmission planning function formerly performed by VENCorp in the Australian Energy Market Operator (AEMO) in 2009.

Clause 14 of the AEMA3 commits the States and Territories to a full handover of distribution and retail regulation to the national framework. The last substantial tranche of regulation that is due to be thus handed over is the "non-economic" regulatory framework, which largely encompasses:

(a)provisions supporting full retail competition in the energy markets; and

(b)a detailed customer protection regime to ensure that energy customers are assured of an acceptable level and quality of provision of essential energy services.

The National Energy Customer Framework (NECF) provides a national framework for this non-economic regulation through a substantially identical framework to the existing NEL and NGL. That is to say -

  • The framework is a national applied law framework with South Australia as lead legislator; and
  • The framework provides for a national enabling law called the National Energy Retail Law (NERL) and a subsidiary statutory rule set called the National Energy Retail Rules (NERR) which may be amended and reviewed by the AEMC.

The NECF also provides for a national retailer authorisation scheme which is intended to replace in entirety the jurisdictional licensing schemes for energy and retailing. It is assumed in this paper that commencement of the NERL in the retail sector will see the complete removal of any requirement for a retailer to maintain a Victorian retail licence to sell energy in Victoria.4

On the other hand, there is no proposed replacement scheme for the authorisation of distribution, transmission or generation activities at the national level beyond what is already provided by market registration requirements.

The regulatory requirements of the NECF itself do not hinge on the concept of licensed energy businesses. Relevant entities covered by the NECF include authorised retailers, entities that retail electricity but are exempt from authorisation, electricity distributors who are Distribution Network Service Providers (DNSPs) under the National Electricity Law, gas distributors subject to access regulation under the National Gas law, and other jurisdictionally nominated distributors. Therefore, from the point of view of applying the NECF alone, no licensing regime is necessary.

Given, then, the history of the licensing regime in Victoria and the anticipated handover of a majority of the ESC's remaining regulatory functions to the national framework, the Department of Primary Industries (DPI) considers it timely to re-examine the rationale for energy licensing in Victoria to ascertain stakeholder views on the continued relevance and necessity of licensing.

In particular, a number of options can be canvassed to reform the current licensing arrangements to better align with the national frameworks for energy regulation. These include repealing the licensing regime in its entirety, replacement with a more limited nomination or registration regime, and supplementation of these options with a more robust regime for regulating small-scale energy suppliers.

These choices are matters of significance to the design of the overall regulatory regime in Victoria once the NECF is in place. In particular, the present licensing regime and the enforcement regime for energy regulation are intimately linked. Changes to the former necessarily entail changes to the latter.

DPI considers that these options should be assessed in terms of their adequacy to ensure that the energy sector in Victoria is well regulated and the interests of the community are protected, as the licensing regime has done for 15 years.

1.1 DPI's approach

DPI is the relevant agency providing policy advice to the Minister for Gaming, Consumer Affairs and Energy on Energy matters. As such, it is responsible for preparing draft legislation for the Victorian Government to implement the NECF.

The Ministerial Council on Energy (MCE)5 has nominated a target implementation date of 1 July 2012 for all jurisdictions to commence the NECF. DPI is working to achieve this timeframe.

Submissions and other responses to this discussion paper will be taken into consideration by the Department in formulating draft implementing legislation for the NECF, tentatively to be titled the National Energy Retail (Victoria) Bill (NERVB).

1.2 Making submissions

Submissions are preferred in electronic format and should be provided to the Department of Primary Industries by Friday 13 May, 2011.
Via email: raif.sarcich@dpi.vic.gov.au
Or mailed to:
Raif Sarcich
Principal Policy Officer
Energy Sector Development Division
Department of Primary Industries
GPO Box 4440
Melbourne VIC 3001

The Department encourages respondents to make their submissions available publicly. Unless certain sections of submissions are marked 'IN CONFIDENCE', all sections of the submissions will be treated as public documents and will be placed on the Department's website www.dpi.vic.gov.au for public access.  Formal requests for confidentiality will be honoured; however, Freedom of Information access requirements still apply to confidential submissions.

2 The regulatory framework today

2.1 Regulatory roles

This section aims to clarify the roles of the different Victorian and national bodies that have a regulatory role in authorising participation in the energy industry.

2.1.1 ESC Role

The ESC administers licences in the following categories under the Victorian Electricity Industry Act 2000 (EIA) and Victorian Gas Industry Act 2001 (GIA):

  • Electricity Retail
  • Electricity Distribution
  • Electricity Generation
  • Electricity Transmission
  • Legacy electricity trading entities (the State Electricity Corporation of Victoria (SECV))
  • Gas Retailers
  • Gas Distributors

The ESC also oversees aspects of a licensing exemptions regime under the EIA (and its attendant general exemptions Order) which imposes conditions on exempt entities. The ESC in 2006 began a review of 'Small scale licensing'6 which sought to rationalise the exemptions regime into a more formal licensing regime for businesses running embedded (inset) electricity networks and engaging in electricity on-selling.7

Some exemptions to licensing under the GIA are also granted, but directly through Orders issued by the Governor in Council.

2.1.2 DPI Role

DPI currently has a role in recommending formal exemptions to the licensing regime through preparing orders to be made by the Governor in Council under the EIA and GIA.

2.1.3 Australian Energy Market Operator (AEMO) Role

AEMO is the operator of the National Electricity Market wholesale exchange, the Victorian wholesale gas market, the NSW and SA (and soon Queensland) wholesale Short-Term Trading Markets, and performs functions for the various gas retail markets. AEMO is also the National Electricity Market (NEM) system operator, operator of the Victorian gas declared transmission system and the independent planner of the Victorian electricity declared transmission system.

AEMO is charged with ensuring that it performs these roles while ensuring that industry participants are protected from the risk of default against wholesale market payments. To this end, AEMO is given – under the national frameworks – the ability to require registration of participants in the electricity and gas markets.

Registration in the NEM is required to operate as a generator, a retailer or a network, effectively ensuring that registration is an across-the-board requirement in the wholesale electricity market.

The requirements for registration in the gas markets, including the declared wholesale gas market in Victoria, are set out in Part 15A of the National Gas Rules (NGR). This part sets out the various 'registrable capacities' in which a body may be registered (i.e. as a transmission service provider, distributor, retailer, producer, storage provider and customers). Separate registrable capacities and registrations are provided for other gas markets, such as the Victorian, NSW, ACT and Queensland retail gas markets and the Short Term Trading Markets.

AEMO's criteria for registration are prudential and technical in nature, and aimed at ensuring that participants will be able to meet their financial responsibilities in the market and to system security. It does not look at broader concerns such as ability to meet other regulatory obligations (e.g.  customer protection requirements).

The transmission planning and system operation functions of AEMO in the Victorian electricity industry were formerly performed by VENCorp. These functions in other jurisdictions are generally performed by the asset owners of the transmission network (in Victoria, this is SPI PowerNet). As these functions were seen as being those of a transmission network, VENCorp was the holder of a transmission licence in Victoria. This licence was revoked, and the necessity to hold it was abolished, when VENCorp's functions were transferred to AEMO in 2009. AEMO itself does not have a Victorian licence, nor is it required to have one.8

2.1.4 AER Role

The AER is to assume the role of authorising retailer participation in the electricity and gas markets under the NECF, and also providing exemptions to the requirement to be authorised to some bodies that are engaging in energy sale activities (generally incidental to their main business such as caravan parks).

The AER currently also has a role in providing for exemptions from the requirement for certain businesses – that may be construed as owning or operating a transmission or distribution network – from the requirement to be registered under the NER and the requirements of Chapter 5 of the NER.9

2.1.5 ESV Role

Energy Safe Victoria (ESV) administers a different licensing regime under the Electrical Safety Act 1998, Gas Safety Act 1997 and Building Act 1993. This regime applies to electricians, inspectors and trainers, and gas plumbers.

ESV regulates all sections of the natural gas and LP Gas industry other than the production of gas, the transportation and storage of LP Gas, and all aspects of the supply and use of autogas. ESV plans for the continuing safety of the gas distribution system both now and in the future.

ESV is involved in assessing 'safety cases' required under gas licences issued by the ESC. It cooperates with AEMO in handling gas emergencies.

ESV's electrical and gas industry safety licensing regimes is not under consideration of review at this time. However, any licensing-based compliance functions it administers will need to continue under a reformed EIA/GIA regime with suitable powers.

2.2 Objectives and functions of the licensing regime

The licensing regime was originally introduced with two principal objectives in mind; firstly to determine who may participate in the industry, and secondly to regulate that participation. In both respects, the licensing regime was conceived as an instrument of government policy, while administration and development of that policy was delegated to the independent regulator (the ORG and then ESC). The EIA and GIA have both been substantially amended several times since that time and also the current NEL and NGL enacted, so the current regime is administered in a different context to its 1990s origins.

At present, the ESC is required to undertake its functions – licensing included – according to the objective of the ESC Act10 (s. 8) as follows:

  1. In performing its functions and exercising its powers, the primary objective of the Commission is to promote the long term interests of Victorian consumers with regard to the price, quality and reliability of essential services.
  2. In seeking to achieve its primary objective, the Commission must have regard to the following facilitating objectives-
    (a) to facilitate efficiency in regulated industries and the incentive for efficient long-term investment;
    (b) to facilitate the financial viability of regulated industries;
    (c) to ensure that the misuse of monopoly or non-transitory market power is prevented;
    (d) to facilitate effective competition and promote competitive market conduct;
    (e) to ensure that regulatory decision making has regard to the relevant health, safety, environmental and social legislation applying to the regulated industry;
    (f) to ensure that users and consumers (including low-income or vulnerable customers) benefit from the gains from competition and efficiency;
    (g) to promote consistency in regulation between States and on a national basis.

The licensing regime provides a means by which the ESC acts to achieve these objectives. In particular, by providing a means of imposing and enforcing regulatory requirements, the ESC is able to act to advance any of the factors embodied in the Commission's objective and the Government's policy objectives as embodied in the EIA and GIA. In terms of the latter, and as much as the licensing regime is a legislative instrument, it has provided a means by which policies have been implemented reflecting the larger scope of economic, environmental and social imperatives facing the Government.

This has led to the licensing regime having a diverse range of functions in practice. This can be characterised as follows:

  1. Limiting entry to the energy sector.
  2. Imposing regulatory obligations on licensed businesses.
  3. Imposing statutory obligations on licensed businesses.
  4. Prohibiting cross-ownership between licensed businesses of different types.
  5. Identifying energy businesses that may exercise special statutory powers.
  6. Requiring exit from the energy sector (revocation).
  7. Funding regulatory activities.

A brief outline of how these functions currently work is provided below.

2.2.1 Limiting entry to the energy sector

The first function of the licensing regime is to limit entry to the energy sector to those companies and individuals who are able to function effectively in a highly regulated environment involving large continuous financial transactions. It should be noted that this is a function held in common with the market registration function administered by AEMO.

Limitation of entry is achieved by means of imposing a general prohibition on the generation, distribution, transmission, sale or supply or energy11 without a licence.

In the distribution sector, a further prohibition is placed – via licence conditions – on distributors from distributing energy outside of their designated distribution area.12 This has the effect of granting distributors exclusive franchises over their distribution areas, and precludes competition at the boundaries. This has been justified on the basis that distribution is a natural monopoly, and competition would result in inefficient planning outcomes.13

To ensure that licences are granted to qualified applicants, the provisions of the EIA and GIA provide entry tests against which the ESC must assess applicants. Section 19 of the EIA (for example) provides:

(2) The Commission must not grant an application for the issue of a licence unless the Commission is satisfied that-

(a) subject to subsection (3), in the case of an application for a licence to sell electricity, the applicant is financially viable; and

(b) subject to subsection (4), the applicant has the technical capacity to comply with the conditions of the licence.

The NECF similarly provides for a general prohibition on the sale of energy without authorisation, entry criteria for retailers and provision for exemptions to be granted by the AER.14

The ability also exists for the Governor in Council to make an Order to exempt some entities from the requirement to be licensed15 and thus the general prohibition on engaging in generation, distribution, transmission, sale or supply of energy without a licence. This may be subject to conditions. In this way, the licensing regime's structure provides for limitation of entry and regulation of both licensed and unlicensed entities in the energy sector.

2.2.2 Imposing regulatory obligations on licensed businesses

Licences provide the means by which the regulator may impose regulatory obligations on licensed businesses. In Victoria, a number of major regulatory obligations take the form of licence conditions written directly into licences (often mirroring statutory requirements). These conditions include, for example:

  • Retail – obligation to offer to sell to certain customers.
  • Distribution – obligation to connect customers.
  • All – obligation to provide information to the Commission.
  • All – obligation to cooperate with AEMO.

Direct licence conditions also provide a means of imposing differentiated regulatory obligations on a per-business basis or developing subclasses of standard licences tailored towards specific circumstances. An example is those licensed retailers that are subject to a restriction that they may only sell to customers that consume above the former16 Victorian 'large customer' consumption threshold of 160 megawatt hours (MWh) per year.

Victorian energy licences also contain a standard condition obliging licence holders to comply with orders, codes and guidelines applicable to that licensee. In this way, the broader regulatory framework administered by the ESC derives its authority as a condition on the licence (and thus continued operation) of the licensed business. Failure to comply with the various orders, codes and guidelines may result in the ESC seeking to enforce compliance17 with the ultimate sanction being licence revocation. These instruments are extensive, and are listed in the Appendix to this paper for reference.

Exempt entities are also subject to regulatory requirements by virtue of the conditions of their exemption from the requirement to be licensed. For example, under the General Exemption Order in Council, the following conditions are specified:

  1. For small generators –the total exported output of the relevant electricity generator or group of generators must be supplied or sold to a licensed retailer; and the exempt person must observe all applicable provisions of the Distribution Code.
  2. For intermediate distributors – to comply with applicable provisions of the Distribution Code, to make best endeavours to resolve disputes with clients and tenants, to continue to supply those clients and tenants in the event of a dispute, and to advise of their right to have a dispute heard by the Victorian Civil and Administrative Tribunal (VCAT).
  3. For metered intermediary sellers of energy – to observe applicable provisions of the Retail Code, observe an applicable Pricing Rule, advise customers of their right to purchase from a licensed retailer, continue to supply electricity, and dispute resolution requirements as per intermediate distributors.

Individual exemptions display a more varied and individually tailored set of requirements.

Enforcement of conditions in exemption orders is more difficult. To take section 17 of the EIA as an example, although it allows for the making of an exemption order, it makes no provision for enforcement at all. And as there are no licence conditions (self evidently), then the order cannot be enforced through the licence. That said, section 17(4) does allow for the conferral of functions and powers on the ESC, but the General Exemption Order made 30/4/02 (Gazette S73 of 1/5/02) does not confer on the ESC any enforcement functions. This therefore leaves the remedies as either the ESC seeking a declaration and injunction through the courts if an exemptee contravenes the General Exemption Order, or Police action. The latter is not only suboptimal, but also most unlikely in practice.

2.2.3 Imposing statutory obligations on licensed businesses

The licensing regime has also been utilised directly by Government as an instrument to deliver on specific policies, placing statutory obligations on licensed businesses while bringing compliance with those obligations into the purview of the regulator.

Under the EIA and GIA, a number of obligations imposed on licensed businesses are framed as deemed licence conditions. For reasons of administrative efficiency, it was determined that it would be most appropriate for these statutory requirements to be enforced by the ESC as if they were ordinary licence conditions (regulatory requirements) imposed by the ESC itself. These deemed licence conditions include:

  • Restrictions on sale to certain customers (s. 23 (1) EIA)
  • Inclusion of facilitating terms for the solar feed-in tariff in UoS agreements (s. 40FH (2) EIA)
  • Reporting on solar feed-in tariff (s. 40FJ EIA)
  • Requirement to purchase energy from feed-in tariff generators and customers (s. 40MD & 40ME EIA)
  • Energy bill benchmarking (s. 40R)
  • Financial hardship policies (ss. 43 & 46A)
  • Advanced metering infrastructure (s. 46C EIA)
  • Retailer of Last Resort (s. 49H EIA)

Victoria's electrical and gas safety regimes are specified in law under the Electricity Safety Act 1998 (ESA) and Gas Safety Act 1997 (GSA). These Acts also impose obligations upon licensees under the EIA and GIA regimes; for example s. 141 of the ESA gives the Director of ESV the power to direct licensees, while all gas licensees are subject to the requirements of the GSA as gas companies.

2.2.4 - Prohibiting cross-ownership between licensed businesses of different types

The EIA (Part 3) and GIA (Part 6) contain "cross-ownership" regimes which are designed to prevent vertical integration between owners of generation, transmission and distribution infrastructure. This regime was instituted in the early 1990s to aid the development of the newly commercialised electricity sector by preventing cross-ownership which may have jeopardised the 'open access' nature of the electricity grid and hindered competition in the generation and retail sectors. An equivalent regime was introduced into the GIA in covering the gas transmission and distribution sectors.

This regime is predicated on there being licences in particular by preventing cross-ownership between a generation licensee and a distribution or transmission licensee.

DPI released a discussion paper on the need for the cross-ownership regime in 2005. It concluded that these provisions should be removed in favour of generic reliance on the provisions of the Trade Practices Act 1974 (now the Competition and Consumer Act 1974):

It can be concluded that sole reliance should be placed upon the TPA provisions for regulating changes in ownership in the national energy markets, on the basis that:

  • the current cross-ownership rules are arguably inappropriate, given that their only substantive effect is to preclude parties from challenging the ACCC's views on the merits of a particular merger, which is undesirable given the lack of transparency and informality in its pre-merger process.18
  • State-based cross-ownership rules may be inappropriate as energy markets are becoming increasingly national in character, so that effects from outside of a particular State are important.
  • As the public policy objective for market structure in energy is the same as that for other sectors in the economy – preserve effective competition – the rationale for further restrictions on mergers is arguably unclear. Quantitative cross-ownership rules may be inappropriate as many factors apart from concentration affect the impact on competition from a merger, and so any preset limit is unlikely to be valid across all potential cases, nor remain relevant over time.19

It should also be noted that a COAG decision in February 2006 tasked the Ministerial Council on Energy (MCE) with developing specific recommendations to "maintain such separation of generation and transmission activities in a form that complements the provisions of the Trade Practices Act". At the 4 December 2009 meeting, MCE "agreed to reaffirm its commitment to finalise the COAG decision to strengthen the structural separation of ownership arrangements for assets in the regulated and competitive sectors and agreed to task the MCE Standing Committee of Officials (SCO) with developing an agreed policy position … for consideration at the next MCE meeting". This work program has been somewhat delayed, although a Regulation Impact Statement (RIS) assessing potential new measures to preserve the separation of generation and transmission ownership is currently being developed for consideration by SCO.

2.2.5 Identifying energy businesses for the purposes of statutory powers of energy businesses.

Operators of energy generation, distribution and transmission assets play a role in maintaining essential infrastructure that extends into public and private lands across the whole of Victoria. It is therefore essential that these businesses be able to do necessary works and comply with significant obligations to ensure the continued operation of the electricity grid and gas networks.

The EIA (Part 5) and GIA (Part 7) contain provisions regarding the special powers of electricity and gas companies. These powers relate principally to making and acquiring easements, and entering lands to perform works. The powers are granted to electricity corporations under the meaning of Part 5 of the EIA and gas transmission companies and gas distribution companies under the meaning of the GIA, whose definitions in turn are predicated on the companies being licensees.

The ESA also grants some specific powers to licensees, for example Section 46, which exempts licensees from a general prohibition upon making installations on public land.

2.2.6 Requiring exit from the energy sector (revocation).

The licensing framework provides an ultimate means of forcing exit from the energy sector, as revocation of a licence effectively means the loss of an ability to continue operating legally as an energy business.20

In practice, licence revocation has never been used as a means to force exit from the energy sector, although it is a power held by the ESC as the ultimate sanction for regulatory non-compliance. The implications of sudden exit of some businesses – particularly network operators – could be severe for the market and customers if alternate arrangements are not put in place to respond to such an event.

In the retail sector, revocation of a licence can play a role as a "trigger" for the supplier of last resort regime as specified in Part 2, Division 8 of the EIA21 and Part 3, Division 6 of the GIA. This regime provides for the transfer of a retailer's customers to retailers of last resort (RoLRs).

It should be noted that the NECF provides for the revocation of a retailer's authorisation by the AER, and that this revocation could trigger the "Retailer of Last Resort" (RoLR) provisions under Part 6 of the NERL.22 The NECF also provides for the authorisation of retailers who have triggered a RoLR event (for whatever reason) to be specifically revoked. Note that this is not a feature of the supplier of last resort regimes under the EIA and GIA.

The ESC's power to revoke licences derives from its power under s. 20 of the EIA and s. 28 of the GIA to determine the term of licences. The way in which a licence may be revoked under the Victorian licensing regime is spelled out in the licence conditions. These provisions do vary slightly from business to business, but in general, the ESC has determined that it may revoke:

  • By agreement with the business; or
  • Giving notice to the business if it considers that:
    • The licensee has not complied with an enforcement order or undertaking; and
    • That revocation is necessary having regard to the Commission's objective.

2.2.7 Funding regulatory activities

In Victoria, the ability to charge fees to industry for licences provides the primary means of funding the costs of regulatory oversight of the industry. Funding through fees ensures that these costs are borne by firstly by the industry and ultimately by energy users in a proportionate manner.

The ESC charges annual licence fees approved by the Minister for Finance, WorkCover and the Transport Accident Commission subject to s. 22 of the EIA and s. 30 of the GIA. The fees range from four-digit fees for small retailers and traders to fees in the high six-digit range for distributors.23 The ESC's approach to setting these fees is set out in Box 1.

Box 1 : Approach to licence fee setting


In determining licence fees, the Commission undertakes the following primary process:

  1. Determines the total costs of the Commission for the relevant year, distinguishing between project costs and indirect overhead costs.
  • Applying a methodology to allocate indirect overhead costs to projects, but excluding those overhead costs that are not considered to be integral or directly related to the regulatory function of the Commission.
  1. Determines the costs to be recovered through licence fees.
  • Identifying those projects where the costs should be recovered through licence fees.
  • Considering any deferred costs to be recovered from previous years and costs to be deferred for recovery in succeeding years.
  1. Determines the licence fees.
  • Identifying those projects that are directly applicable to particular industries or industry sectors.
  • Where projects cover more than one industry or sector, applying a methodology to allocate project costs across the industries or sectors.
  • Considering appropriate categories of licence within sectors and the costs to be recovered from individual licensees.

Source: Essential Services Commission (Victoria). Information paper - Licences and Fees. On the web, November 2009.

3 Future of distribution licensing arrangements

As noted in the introduction, in light of the very substantial handover of regulatory functions to the national frameworks anticipated with the NECF, the question arises as to the future of non-retail licensing and by whom. In any event, the NECF will see the removal of any Victorian licensing requirement upon energy retailers in Victoria as that function is fully subsumed by the NECF under the national retail authorisation regime. The question therefore pertains to gas distribution, electricity distribution, electricity trading, electricity transmission and generation licensing. Electricity transmission and trading licenses have separate issues and are discussed in section 5 while generation is discussed in section 4 – the rest of this section pertains only to gas & electricity distribution licensing.

There are initial attractions to the view that, having largely transferred regulatory requirements to national frameworks, a regulatory impost which involves a barrier to entry and an ongoing cost could be abolished. This would fit within the overall aspiration reducing the regulatory burden and to address barriers to entry in areas such as renewable energy generation24. However, retaining this requirement may be justified if important functions remain which are most efficiently achieved via a licensing framework.

DPI's framework for assessing this question seeks to address the following points:

  1. When the NECF is implemented, will there be substantial functions remaining within the Victorian energy legislative or regulatory framework which are currently underpinned by licensing?
  2. If so, must these functions be performed by a licensing regime?
  3. If not, what are the alternative means for achieving the same end, and what is the most efficient option given the substantial interaction with the national frameworks?

3.1 Will there be substantial regulatory functions remaining in Victoria?

This question is best addressed in terms of the functions outlined in section 2.2 of this paper.

It should be noted at the outset that the discussion hereafter revolves around two quite separate sets of issues, concerning large-scale and small-scale operators respectively.
'Large-scale' is taken to mean those entities involved in the primary supply of energy to and from the interconnected energy networks, including the nine licensed distributors. 'Small scale' activities refers to everything else.

Small scale energy activities have been increasing in importance for some years now, due to changing technology and commercial drivers. As the ESC noted in its issues paper for its small scale licensing review:

The [Order-in-Council governing general exemptions] was originally designed to only apply to the incidental supply of electricity, such as that distributed within a caravan park. However, the OIC is increasingly being used to facilitate more substantial supply arrangements. These include various combinations of customer/demand aggregation usually in embedded networks sometimes incorporated as combined heat and power facilities.

The emergence of these new models of energy supply represents a new source of competition in retailing, generation and distribution networks. However, small scale energy supply operations present new challenges with respect to regulation and competition policy, in particular determining whether and how an appropriate level of customer protection arrangements can be put in place.25

The ESC's conclusion was that the existing exemption OIC was in need of reform and did not afford the flexibility needed to deal with a changing energy supply sector. Regulatory awareness of the number of small scale operators, and enforcement power respecting small scale activities is currently found wanting by the regulator. DPI would seek not to reproduce the shortcomings of the current system in a future regime under the NECF, so improvements along the lines recommended by the ESC will be considered.

The small-scale sector, however, is an area where significant innovation is occurring, and encompasses projects which seek to improve energy efficiency by combining on-site power generation with utilisation of waste heat; an area of increasing focus in terms of adapting to carbon constraints. Any solution adopted will need to be flexible enough to not prevent the development of this sector in customers' interests.

3.1.1 Limiting entry to the energy sector

On face value there is little need to utilise licensing to limit entry to the distribution sector. Electricity distribution has classically been characterised as a natural monopoly, and the threat of a significant new entrant to this area is understood to be low.

In terms of assessing the competence of entities to function as distributors, although this is a formal requirement of the licensing regime, the licences were initially granted to State-owned entities prior to privatisation, and have mostly transferred from owner to owner since that time. It could be said that there has been a tacit assumption that any organisation(s) with the financial resources to purchase ownership of a distribution company will also have the resources to ensure that it continues to be run competently.

Nevertheless, while the threat of entry of a new competitor in general distribution is low, distributors face competition at the edges of the distribution system in 'greenfields' sites, either from other distribution companies or from smaller scale operators.

The current licensing framework has assisted to leverage some gains from competition between distributors for infrastructure provision in greenfields sites without exposing the industry to unregulated competition. For example, the redevelopment of the Docklands site saw the Docklands Redevelopment Authority contract with Powercor to serve the redevelopment district, and a new exclusive franchise and licence was granted by the ESC to support this.26

At the same time, numerous entities operate infrastructure which can be construed to be for 'distribution' for their own commercial purposes, albeit generally on private land only. Examples are shopping centres, Melbourne Airport and the Melbourne Convention and Exhibition Centre. Although the distribution of energy may be incidental to the main business of these entities, the choice to construct infrastructure that constitutes a private (inset or islanded) network may be a choice made by the business, for reasons of cost benefit compared to a solution available from the local distributor.

A further group operates 'distribution' infrastructure for unavoidable reasons related to their business. For example, Melbourne's tram and train operators must operate significant electrical infrastructure to run these modes of transport. This is not considered to be a competitive choice. Caravan parks may also fall into this category, as the need to provide energy to individual camp sites may not be able to be met cost effectively by distributors.

It would be impractical to prevent the 'entry' of those who must operate some form of distribution infrastructure unavoidably and incidentally to their business. For this reason, any solution adopted should allow such cases to be exempt from such a limitation.

The general purpose of limiting entry is to ensure that customers' interests are protected by ensuring that only competent entities can distribute energy, and to ensure that planning outcomes are efficient. However, competition and innovation in network solutions should be facilitated to the extent possible, by allowing for new infrastructure to be built on competitive terms in a well regulated manner.

Where new infrastructure is built by entities other than the major distributors (including small-scale operators), a range of further issues ensue regarding customer protection. Ensuring that customers have access to a supply of energy that is of an acceptable quality, not subject to frequent interruptions, ensuring that customers are not disconnected without due consideration, and ensuring that they have a choice of retailer all become more difficult under these circumstances.

Victoria has generally taken the approach that customers' best interests are served by competition for the sale of energy, and this is reflected in arrangements allowing for customers to choose their electricity retailer even if they are served by an intermediary distributor. It should be noted that in gas, however, metering to allow retail contestability inside inset networks is not currently practicable or facilitated by the industry, and so regulation of inset networks in gas is – and may continue to be – more restrictive than that applying in electricity.

Questions

  1. What should the basis of any limitation on entry to the distribution sector be?
  2. What kinds of network infrastructure should be exempted from such a limitation?
  3. What measure of competence should be satisfied by a business choosing to build some form of distribution infrastructure?

3.1.2 Imposing regulatory obligations on licensed distribution businesses.

DPI is currently assessing the implications of the NECF for Victorian energy regulation. Due to the differing structure of the national frameworks and the Victorian regime, the extent of overlap and duplication requires detailed analysis to uncover.

Nevertheless, it is clear that there are substantial areas where important regulatory obligations concerning the operation of Victoria's interconnected energy systems exist which are not covered by the national frameworks as developed to date. The instruments where these reside include:

  • Electricity Distribution Code
  • Gas Distribution Code
  • Electricity System Code
  • Advanced Metering Infrastructure (AMI) Orders in Council
  • Public Lighting Code

Due to the complex nature of these documents, and the particular arrangements that have been put in place in Victoria to facilitate the competitive market (many of which pre-date and/or differ from arrangements in other jurisdictions), it is expected that there will be some provisions which will be required to continue as Victorian-specific regulatory requirements.
Separately, in the small scale distribution sector, the ESC's final recommendations in its small scale licensing review recommended a number of new obligations be imposed in addition to those currently imposed through the General Exemptions Order (see Box 2).

Box 2 : ESC (proposed) small scale licensing conditions

[The ESC recommends the Order be amended to:]

  • Extend the requirement to inform business customers of their right to retail choice to esidential customers.
  • In the event that section 35 of the Electricity Industry Act 2000 (EIA 2000) ceases to have effect, provide the Commission (or responsible agency) with the power to reference or establish an alternative reference tariff to which the Pricing Rule will apply.
  • Include a requirement to be members of the Electricity and Water Ombudsman (EWOV) Scheme and inform customers of their right to access the services of EWOV's dispute resolution mechanism.
  • Remove the requirement to advise the customer of his or her right to apply to have the matter heard by VCAT.
  • Include a requirement to provide customers with information on concession entitlement rebates as provided by the relevant authority.
  • Include a requirement to observe all applicable provisions of the Electricity Customer Metering Code.
  • Include a requirement to observe the Commission's Wrongful Disconnection Procedure.
  • Include a requirement that late payment fees must not be imposed on customers consuming less than 20 MWh per year.
  • Include a requirement for the operator to provide each of its customers with current details on who to contact if the customer has any questions or concerns in relation to their network.
  • The Commission is also proposing that a Code or Guideline for embedded networks be developed. To this end, the Commission also recommends that the following obligation apply:
  • Observe any Code or Guideline that the Essential Services Commission may issue in relation to embedded networks.
  • Source: See footnote 1

DPI considers that it would be timely and advantageous to apply a framework which allows the imposition of similar obligations on small scale network operators (though updated to reflect the NECF context), and seeks comment from stakeholders on the impact and feasibility of doing this.

Questions 

  1. What impact will arise from the imposition of regulatory obligations on small scale network operators?

3.1.3 Imposing statutory obligations on licensed distribution businesses.

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

  • Feed-in tariff obligations.
  • AMI obligations.

These provisions are integral parts of the overall Victorian energy regulatory framework, and must be retained for the foreseeable future.

3.1.4 Prohibiting cross-ownership between licensed distribution businesses of different types.

The current cross-ownership provisions of the EIA and GIA are complex and, as DPI's 2005 discussion paper explains, do not override or substantially depart from the broader Competition and Consumer Act-based merger and competition regime.

The 2005 paper also details how the industry has moved to voluntarily disaggregate itself for commercially driven reasons, a trend which has continued to 2010.

The NECF also sees a decisive move from State to national regulatory arrangements. Retaining the cross-ownership provisions would require oversight by a suitable regulator. The ESC would not necessarily retain the expertise necessary to regulate industry ownership structures after it hands over its energy regulatory function to the AER. Also, conferring a State specific function of this sort on the AER is not without its difficulties (this especially as it is a function more fitted to the ACCC) as that in terms of the latter that in turn raises issues with the ACCC's functions under the Competition and Consumer Act 2010.

For these reasons, DPI seeks stakeholder feedback on any reasons why the cross-ownership provisions of the EIA and GIA should not be repealed as part of the NECF legislative package.

Questions

  1. Is there any reason why Victorian-specific cross-ownership restrictions are required in the energy sector after the commencement of the final national frameworks?

3.1.5 dentifying energy businesses for the purposes of statutory powers of distribution businesses.

It would seem self evident that there is a continuing need for network businesses to have access to the statutory powers of Part 5 of the EIA and Part 7 of the GIA, as works on public and private land is integral to network service provision. However insofar as that function presently "piggy backs" off the businesses being licensed, the issue is how other wise might the businesses be identified.

Questions

  1. How might businesses that must exercise these statutory powers be identified in the absence of holding a licence?

3.1.6 Requiring exit from the distribution sector.

The likelihood of a regulator exercising its power to revoke the licence of a large scale distribution business is extremely low, as the impact of removing the licence to operate critical infrastructure could be severe to the community in general.

Nevertheless, the theoretical possibility exists of a network business breaching its obligations (e.g. with respect to safe and reliable upkeep of the network) to such a great extent that the regulator is moved to force its exit from the industry. While this may be achieved by licence revocation, what would come next is quite unclear. Not only would a 'recalcitrant' network business need to be forced out, but operation and control of the network would need to be transferred to another entity to ensure continuity of supply.

The EIA and GIA27 provide for administrators to be appointed to licensees by the ESC if regulatory non-compliance threatens the security of energy supply. 'Step-in' rights of these kind may provide a more workable intervention in the same scenario. As the market becomes national in character, it would be desirable for these step-in rights to be developed at the national level.

Questions

  1. In what circumstances might a network business be required to cease operating?
  2. What alternatives are there to appointment of administrators to businesses that are required to exit the energy sector?

3.1.7 Funding regulatory activities related to distribution.

Regulatory activities will need to be funded. The available mechanism to provide funding depends on the body appointed to perform the task of administering and enforcing regulatory arrangements. Victorian agencies may be funded from industry fees or general revenue as appropriate. Functions performed by the AER are funded by the Commonwealth under the terms of the AEMA.

The overall costs passed through in distribution licence fees currently can be expected to decline significantly in future as fewer regulatory activities are conducted by Victorian agencies. Correspondingly, the cost of regulation by the AER will increase as it takes over these responsibilities.

Questions

  1. 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?

3.2 Cross-border& miscellaneous issues

3.2.1 Cross border issues

Distribution systems cross the border from NSW and SA at various points to serve customers who cannot be economically connected to the Victorian distribution networks. These networks are currently covered by exemptions from distribution licensing, including:

  • Essential Energy28 - Bonang, Tebbutt, Dedick, Goongerah, Delegate River, Bendoc, Lower Bendoc, Jingellic, Bongilla Island and Tocumwal.
  • ETSA Utilities – Near the Victoria-South Australia border.

Both of these distributors are required to supply customers on equivalent terms as apply in their home jurisdictions. An exemption from retail licensing is also granted to retailers (Country Energy and others) on Country Energy's cross-border network, on the same terms.

The advent of the NECF should remove the need for specific exemption for retailers on these cross-border networks; however the existence of the distribution systems needs to be provided for.

Unless specific provisions are developed to the contrary, the NECF will apply to all parts of all distribution networks in a jurisdiction (including parts of networks that are principally located in another jurisdiction). This stems from the definition of 'distributor' in the NERL – which is essentially those distributors regulated under the NEL or covered under the NGL.

This means jurisdictions which 'share' a network will need to liaise to develop transitional arrangements for the network. It is expected that the jurisdiction in which most of the network resides will lead and drive this process, but the approach may be different for different networks/jurisdictions.  The national reforms should ideally ensure that the authorising environment is consistent for a single distributor, despite geographic quirks.

In practice, this should mean that cross-border networks should be subject to the authorising environment, and attendant regulatory obligations, of their primary jurisdiction. This is generally the case today, with licence exemptions providing, for instance, that Country Energy should comply with its NSW regulatory requirements when serving Victorian customers.

The Victorian distributors Powercor and SPI PowerNet also border NSW and SA and have assets which may cross the border at various points. At the moment, this does not appear to pose an issue for Victoria. DPI invites comment on any points of interest regarding Victorian distributors in NSW and SA.

Questions

  1. Are there any issues regarding NSW and SA distributors who supply customers in Victoria?
  2. Are there any issues regarding Victorian distributors who supply customers in SA and NSW?

4 Future of electricity generation licensing arrangements

The questions surrounding the framework for generation regulation in future are less complicated than that for the distribution framework, owing to the extent to which regulation has already shifted to the national framework. However, ongoing technological development and the increasing focus on distributed energy generation may throw up new issues. This section discusses the need for an authorisation framework in generation.

4.1.1 Limiting entry to the generation sector.

There is a need to ensure that generators are competent to interact with the electricity system without endangering system security and reliability. However, this function is substantially performed by the registration process administered by AEMO. AEMO's process for new generator registration is a detailed one, involving consideration of technical requirements, generating unit data, performance standards, generator data and model requirements and black system procedures, amongst others.29 This provides a much higher level of scrutiny than the relatively cursory examination given to generation proponents through the licensing process.

On the small scale generation side30, many generators are already subject to a deemed exemption from licensing. DPI notes the AEMC's reviews of Distribution Network Planning and Expansion29 and Demand Side Participation30 which should provide enhancements to the rules surrounding embedded or distributed generation, while the AER will have regulatory oversight of embedded generator connections under the NECF.

Finally, the question of 'off-grid', standalone and islanded generation may become more prominent as the electricity grid is modified in response to technology improvements as well as to the threat posed by bushfires to electricity infrastructure. For example, ESV is currently leading a trial of "remote area power systems", whereby electricity infrastructure in more remote areas is removed and replaced with localised power systems.

DPI welcomes feedback as to whether and to what degree the small scale generation sector should be subject to specific regulatory oversight in future. For example, is specific regulation required where the output of on-site generation is on-sold to tenants and clients of a landowner?

Questions
  1. Is there a need to further limit entry to the generation sector (in addition to AEMO's registration role?)
  2. Should the small scale generation sector be subject to specific regulatory oversight? If so, should this be through Victorian or national regulatory instruments?

4.1.2 Imposing regulatory and statutory obligations on licensed electricity generation businesses.

The electricity generation sector is a competitive sector, unlike the distribution and transmission sectors. As such, it is less heavily regulated than the network sectors, as there is no perceived need to address monopolistic pricing power through economic regulation. Further, that regulation which does exist is mainly either of a safety/technical nature (and outside the national energy regulatory frameworks per se) or facilitates participation in the wholesale market and system control, and is thus fully covered by the NEL and NER.

Victoria's regulatory regime does impose some responsibilities, mainly via the Electricity System Code, to facilitate the planning, coordination and orderly dispatch of generation in the system, as well as licence obligations to cooperate with AEMO and provide information to the ESC.

While these obligations will be reviewed by DPI in light of the national frameworks, DPI will assume that there will be a need to ensure that current relationships between generators and AEMO in its capacity as Victorian transmission planner are maintained.

4.1.3 Prohibiting cross-ownership between licensed businesses of different types.

DPI considers this issue to be generic to the energy sector as a whole, and it has been discussed in section 2.2.4.

4.1.4 Identifying generators for the purposes of statutory powers of energy businesses.

Generators are granted statutory powers on the same terms as other energy businesses under the EIA. Generators do not perform works on public land or enter private property in the manner of distributors except in unusual circumstances. However, a power of particular relevance to the generation sector is the power to acquire land (subject to approval by Government) within the LaTrobe Valley area under s. 87 of the EIA. DPI does not anticipate any change to the need for these provisions.

4.1.5 Requiring exit from the generation sector.

In respect of requiring exit, a distinction is to be drawn between those generators which are small scale operations and whose exit could be safely managed by the regulatory regime should they breach obligations to the extent that this is necessary, versus large generators whose operation is essential to the system and where this is not a real possibility. The MCE has a role in managing the risks of large generator failure and exit, and it is not within the remit of this paper to offer commentary on this.

4.1.6 - Funding regulatory activities related to generation.

See discussion in section 3.1.7.

5 Future of transmission and trading licensing arrangements

5.1 Transmission

At present in Victoria, there are no transmission licences (or provision thereof) in gas, as all regulatory functions are fully encapsulated by the national energy laws, while in electricity only SPI PowerNet and Basslink hold licences for transmission. Other interconnectors, such as the Snowy scheme and Murraylink, operate under licence exemptions.

Prior to 2009, VENCorp also held a transmission licence as some of its electricity transmission planning and augmentation functions were considered to be those of a transmission network service provider as per the NEL.

During the transfer of VENCorp's functions to the AEMO, steps were undertaken to move the electricity transmission framework towards the gas framework, ensuring that regulatory obligations were embodied in the national energy laws and recognising the unique institutional role of AEMO. As a result, VENCorp's licence was revoked and not replaced.

A similar step was considered for SPI PowerNet at the time, but has not been acted upon as of yet. Nevertheless, s. 33A EIA remains and may be used – as it was for VENCorp – to revoke SPI PowerNet's licence and effectively retire the transmission licensing regime for good.

With such a limited range of licencees and no substantial regulatory functions now performed by the licensing regime, there does not appear to be any ongoing need for licensing of transmission operators.

5.2 Traders

A final category of licensee under the Victorian framework is that of "Trader". There is only one such licensee – SECV (operating as VicPower Trading) – which continues to operate as the holder of the State of Victoria's long term supply contracts for electricity to the Point Henry and Portland Aluminium smelters.

The SECV buys power from the NEM at wholesale prices and on-sells this energy to the smelters at a price fixed under the contracts.

The SECV operates according to ministerial directions under the Electricity Industry (Resiudual Provisions) Act 1993. No substantive regulatory obligations are imposed on it under the EIA.

The long term supply contracts have expiry dates, the latest of which is 2016 , which the Government does not propose to re-commit itself to. Therefore the SECV is expected to finally cease operation after 2016.

The need for continued licensing of the SECV is therefore perceived to be negligible.

6 Determining the policy response

6.1 What are the alternatives?

For the various functions that have been identified as being performed by the licensing regime, there are a range of frameworks in which they can be performed. For example, the role of imposing regulatory and statutory responsibilities on energy businesses has been taken up by the statutory national Law and Rules based frameworks. DPI considers there are 4 main options, which may or may not provide a suitable framework for the future where the primary regulatory framework is national. These 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. Continue licensing, where no change to the current licensing frameworks is made, but redundant regulatory arrangements are rescinded.
  3. Move to statutes, where authorisation becomes a matter of statutory nomination and obligations are spelled out in statutory frameworks.
  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.

Combinations of these alternatives are also possible.

6.1.1 Open system

An 'open system' arrangement would defer to national concepts of authorisation and registration and not replicate licensing/authorisation (or general prohibitions upon energy activities) at the State level.

This has the effect of completely removing any overlap between jurisdictional and national authorisation functions and would be expected to be the least costly in terms of regulatory burden. On the other hand, it may be the weakest option in terms of enabling regulatory oversight, especially of the small-scale sector.
This option does not preclude the continuation of some form of regulatory obligations through Victorian legislation, but an alternative compliance mechanism would have to be decided upon.

This option precludes any further limitation on entry to the energy sector at the Victorian level. As such, it may be difficult to reconcile with some issues regarding the small scale sectors of the industry.

Prohibiting cross-ownership between businesses would be very difficult if not unworkable with this option, however as noted previously the continuation of any State cross-ownership restrictions is a question for debate.

Finally, identifying businesses for the purposes of statutory powers (such as land access) would be rendered more difficult. These powers would probably have to be backed up by at least some form of registration or nomination under the EIA or GIA, in which case the nature of this option would be more akin to 6.1.3 - Move to statutes.

6.1.2 Continue licensing

This is the counterfactual example, and involves minimal change to current arrangements. As such, all current functions performed by the licensing regime would continue to be performed, although many of the regulatory functions will be removed in deference to the national frameworks. No significant implementation issues are associated with this option, but it delivers a full scale licensing regime and limitations on entry to the energy sector with a much reduced scope of activity in practice. A suitable body would also have to be nominated for continued administration of the regime.

6.1.3 Move to statutes

This option would replace – where appropriate – the requirement to be licensed with a statutory nomination, registration or authorisation concept akin to that established for retailers under the NECF.

This would serve to identify those businesses subject to certain regulatory/statutory obligations and having energy-specific powers. However, the licensing-based regulatory framework would be abolished and regulatory obligations which are now enforced subject to that regime would be re-established as statutory requirements or as Victorian-specific Rules under the national frameworks. This may have benefits in terms of regulatory simplicity and efficiency.

The presence of a formal nomination, registration or authorisation in the Victorian energy supply industry would aid the practicability of maintaining cross-ownership rules, if required, and identifying businesses for statutory powers. This option would also provide a mechanism to exercise an entry check over the small scale sectors of the industry, but imposition and enforcement of regulatory obligations on this sector may still be problematic unless supplemented by much clearer enforcement provisions than is presently the case under the exemption orders regime.

An important consideration in this option is whether (and on what basis) to apply entry criteria to becoming nominated, registered or otherwise authorised to operate in the energy sector, on a small or large scale. The absence of such criteria may lead to disputes and leave the government without grounds to refuse or revoke such authorisation to unsuitable persons. Entry criteria might follow those applied to candidates for retail authorisation under the NECF, such as organisational capacity, financial capacity, and being a fit and proper person to be authorised (including consideration of past involvement in the energy supply sector).

6.1.4 'Inverted' licensing arrangements

A difficulty with all the options canvassed above is the lack of rectification for the existing issues with regulation of exempt suppliers, as explained in the ESC's Review of Small Scale Licensing33.

Although the NECF grants the AER broad powers to regulate exempt sale activities, there still may be regulatory gaps regarding currently-exempt generation and distribution activities. The current regulatory framework is thought to be wanting in this area, and the ESC in its review investigated the institution of a 'small scale licence' for such activities.
This option implements such a small scale licence, while reducing the regulatory burden on regular industry participants by providing for a statutory exemption from the requirement to be licensed (via nomination, registration or authorisation according to some test).

The advantages of this option are in providing for a superior degree of oversight and enforcement over small scale energy activities that may impact end-use customers while reducing the regulatory burden on the energy industry. It may, however, disadvantage some legitimate and innovative small scale energy businesses.

Questions

  1. Do any implications arise from shifts from regulatory to statutory requirements?
  2. Do any implications arise from the absence or replacement of a licensing regime?
  3. 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?).
  4. 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?
  5. On what basis might a person be granted (or refused) such authorisation?

6.2 What is the efficient way forward?

6.2.1 Assessment framework

To assess the efficiency of the various options, DPI needs to assess:

  • The adequacy of the option against any decision regarding current licensing functions to be retained.
  • The costs of the option.
  • Whether the option contributes toward other reform objectives.

The first point has been explored in section 6.1. As no decision has yet been taken on what functions are critical, this will be assessed at a later point.

In terms of costs, the regulatory cost of any option where Victoria retains an energy authorisation function have to be considered, both to the Victorian government and to industry in its compliance costs. Whether that option provides for the costs of that function to be recovered from industry through fees or not also needs to be considered.

In terms of other reform objectives, DPI broadly wishes to:

  • Ensure that industry is subject to appropriately robust regulation to protect consumers and promote efficiency.
  • Maximise consistency with and minimise overlap with the national frameworks and achieve a single energy regulatory framework within Victoria.
  • Reduce the regulatory burden.

A preliminary assessment of the contribution of the various options canvassed to these objectives is contained in table Table 2. DPI has assumed, as a working assumption, that there will be a substantial enough body of Victoria-specific regulatory arrangements continuing under the NECF to make enforcement a live question, although further review of the frameworks will bring the nature of these more clearly to light.

6.2.2 Changes required to implement reforms

One of the implications of the choice of frameworks highlighted in section 6.1 is that in the transition some regulatory obligations may have to be recast as statutory obligations or become Victorian-specific requirements under the national framework. Likewise, some statutory obligations may have to be continued or recast, particularly insofar as the obligations pre-suppose a licence having been issued.

As previously noted in section 2.2, the current suite of regulatory arrangements is underpinned by the licensing regime, which itself is underpinned by a comprehensive enforcement framework overseen by the ESC, with revocation of a licence its ultimate sanction. Removal of this regime will also necessarily remove that framework, and any continuing Victoria-specific requirements will need to be underpinned by a different enforcement framework (and, potentially, a different enforcing body). The way in which this is done has implications for the enforceability of these obligations and the degree of regulatory or compliance burden that is imposed on industry.

6.2.3 Enforcement under a reformed framework

There are three distinct issues regarding enforcement of obligations in a new regime. Firstly; who is to enforce (and whether the enforcement body has exclusive powers).

Regarding this question, there are two independent choices as to whether the licensing regime is retained or replaced (as per the options canvassed in 6.1); and whether the enforcement is done at a jurisdictional level or through the national framework. This gives rise to four potential implementation scenarios which are outlined in table Table 1. These are:

  1. Maintenance of the licensing status quo.
  2. Maintenance of Victorian licensing, but with conferral of functions on the AER.
  3. New Victorian statutory framework for jurisdiction-specific regulation & enforcement.
  4. Supplementation of the national framework with Victorian-specific regulations.

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.

It should be added that if a registration function is instituted in place of the licensing regime to aid the energy businesses' statutory powers under the industry Acts, this may sit with any body, and not necessarily the enforcement body.

Table 1 : Implementation scenarios

 

Retain functions with Victorian regulator(s).

Transfer to national regulator.

Retain licensing regime

(1) Maintain status quo. ESC or another designated body would continue to licence & enforce any related licence conditions.

(2) Licensing & associated enforcement function would be conferred on AER (with agreement of MCE).

Replace licensing regime (with statutory regime, etc).

(3) New statutory framework would be developed with designated enforcement regime & bod(ies).

(4) Regulatory requirements would be made part of the national framework through NERVB, and enforcement functions conferred on AER (with agreement of MCE).

Secondly there is a question as to where and how to enforce (e.g. VCAT, the courts and/or providing access to the Ombudsman).

In respect of this, any requirements which are part of the national framework (or are made part the national framework through the proposed National Energy Retail (Victoria) Bill) would necessarily be subject to the AER's compliance and enforcement framework.34 This framework has a wide range of enforcement powers available to the AER, that have been developed and agreed by the MCE as part of that framework.

On the other hand, retaining the existing licensing regime would allow retention of the existing regulatory enforcement regime to which it is linked. The question of who enforces this is then one of whether a Victorian body such as the ESC continues to exercise those powers, or whether the licensing and enforcement powers are conferred on the AER – as a jurisdiction-specific set of functions – as allowed by the AEMA with the consent of the MCE.

A further option is the determination of a new set of enforcement powers to accompany reformed statutory arrangements.

Statutory requirements may be enforced, if not specified otherwise, by the Police. In the energy industry, this would be a highly inappropriate form of regulation to apply. As an alternative, a system of civil penalties and other remedies could be specified in legislation along with an enforcing body.

Applicable penalties may range from criminal to civil penalties to damages and injunctions or declarations or a combination of all the above. Stakeholder views are invited on the most appropriate forum for enforcement of Victoria-specific regulatory arrangements in the large-scale and small-scale energy supply sectors.

Further consideration will also need to be given to remedies for breaches by any exempt or small scale entities under a future regime, should substantive conditions be imposed on them through the Victorian energy laws in relation to their activities. Again, a system of penalties and a specified enforcement body will be needed. The same types of considerations apply as for large scale operators, especially in respect of providing for an appropriate an accessible resolution body.

A third important issue is what is to be enforced; and from this flows the thresholds for enforcement action. That in turn depends on who may be affected: if it is relatively disadvantaged members of the public a low threshold and a regime may be required with low cost and high accessibility its main attributes such as VCAT.35

DPI will examine the appropriateness of all options in respect of particular regulatory obligations as detailed work progresses on a review of Victoria's regulatory framework in light of the NECF. Stakeholder views are invited on the general enforcement function for Victoria-specific regulatory arrangements.

DPI has yet to come to a firm view on the appropriate enforcement frameworks and notes that the precise enforcement option may have to be determined on a case by case basis depending on the parties and regulatory obligations concerned. Stakeholder comment is invited on where there may be specific issues which may require active ongoing enforcement activity under the Victorian (not national) energy laws after the commencement of the NECF.

Questions

  1. Are there material costs from the duplication of an authorisation function in the Victorian and national frameworks?
  2. What Victorian regulatory arrangements – that are not covered by the future national frameworks – require substantial regulatory oversight?
  3. What is the most appropriate and effective enforcement regime for Victoria-specific regulatory arrangements?
  4. When and where should customers have the right to take enforcement action?
  5. Which body is best placed to oversee Victoria-specific regulatory arrangements?
  6. Should Victoria reform small scale licensing activities in concert with the implementation of the NECF?
  7. What Victorian regulatory arrangements – that are not covered by the future national frameworks – require substantial regulatory oversight?

Table 2 : Comparison of options against reform objectives

 

Minimise cost/regulatory burden

Ensure appropriately robust regulatory oversight

Maximise consistency/minimise overlap with national framework.

Open system

tick

Materially reduces regulatory overlap and removes a regulatory function with substantial administrative overhead.

X

Enforcement powers over industry at-large may be difficult to apply, especially in small-scale area. Potential for regulatory gaps.

tick

This option provides for minimal overlap.

Continue licensing

X

Retains regulatory function with substantial administrative overhead.

?

Depending on body exercising this function, oversight may differ – best performed by dedicated energy regulator. Does not reform small scale licensing activities.

X

This option keeps in place a licensing framework tailored to a separate regulatory framework (although conflicting regulation will be repealed).

Move to statutes

tick

Removes specific regulatory function and replaces with less onerous administrative function.

?

Does not substantially reform small scale licensing activities. Other regulatory requirements will need to be enforced by an appropriate body.

X

This option reduces the complexity of a Victorian energy authorisation function but does not entirely remove it.

Inverted licensing

X

Removes redundant licensing requirement upon industry, but substantially increases requirements on small-scale providers.

tick

Regulatory arrangements will need to be enforced by an appropriate body. Reforms small scale licensing arrangements.

tick

This option may complement AER functions under the NECF, and reduce overlap in general authorisation function.

7 Transitional arrangements

If any reforms are made to the licensing arrangements in Victoria, then the question of how the transition from the existing regime is to be made.

For retail licensees, this issue will be addressed by officials working to the SCER SCO.

In particular, the act of revoking licences held by companies may have implications for those companies even if the requirement to be licensed no longer exists. DPI welcomes feedback from companies on this matter.

Questions

  1. What impacts arise from abolishing licences if licensing arrangements are to be reformed?
  2. Are there any other transitional issues that DPI should be aware of?

8 Conclusion

DPI has not come to a firm conclusion on the appropriate response to the issues raised in this paper. However, the following observations can be made:

  • The authorisation structure chosen must be capable of linking to and supporting important statutory obligations and powers under the energy industry and energy safety laws. At a minimum, major energy companies must be registered, nominated or authorised under Victorian legislation for the purposes of these local provisions.
  • It is desirable that the current Order in Council regime governing small scale generation, sale and supply be replaced with a more robust oversight structure for this sector. The form of regulation should be flexible by nature in order to avoid stifling innovation, but should be more attuned to protection of customer interests than current arrangements.
  • Victoria-specific regulatory requirements will require a regulatory body to administer and enforce them. Nominating an appropriate body will be important to the success of the NECF transition. There are obvious advantages to conferral of some Victorian-specific functions on the AER in order to avoid fragmentation of regulatory responsibilities and approaches and duplicative costs although the AER's status as a Commonwealth body complicates any such conferral. However, State agencies could continue to perform this role as well.
  • Care needs to be taken not to upset current arrangements which are predicated on licensing during the transition. These arrangements may be commercial (as businesses assume the existence of a licence for some commercial reasons) or legal (in as much as other acts such as the ESA, GSA and Pipelines Act have been drafted assuming a licensing regime). DPI will continue to consult with affected parties on these issues.

At the current time it appears as if some form of Victorian based registration or authorisation scheme is warranted. Such a scheme should seek to rationalise arrangements in the large scale energy sector and achieve maximum consistency with the national framework, while in the small scale sector improving oversight and allowing for flexible regulation. DPI will take into account all stakeholder views on the appropriate approach to this challenge.

Appendix – Regulatory instruments under licensing framework

INSTRUMENT

CURRENT VERSION

DATE OF ISSUE

RETAIL

Electricity System Code

1

Oct 2000

Energy Retail Code

7

Feb 2010

Electricity Customer Transfer Code

1

Dec 2009

Electricity Customer Metering Code

6

June 2009

Marketing Code of Conduct

1

Jan 2009

Information specification (service performance) for energy retailers

5

Dec 2008

Guideline 13 (electricity) –Greenhouse gas disclosure on electricity bills

1

March 2009

Guideline 17 (electricity) – Electricity ring fencing

1

Oct 2004

Guideline 19 – Energy price and product disclosure

3

June 2009

Guideline 21 – Energy retailers' financial hardship policies

1

April 2007

Guideline 22 – Regulatory audits of retail energy businesses

2

Sept2009

DISTRIBUTION

Electricity System Code

1

Oct 2000

Electricity Distribution Code

4

Feb 2010

Electricity Customer Transfer Code

1

Dec 2009

Electricity Customer Metering Code

6

June 2009

Public Lighting Code

1

April 2005

Gas Distribution System Code

9

Dec 2008

Information specification (service performance) for electricity distributors

5

Jan 2009

Information specification (service performance) for gas distributors

9

Jan 2009

Guideline 3 (electricity) – Regulatory information requirements

7

May 2010

Guideline 11 (electricity) – Voltage variation compensation

1

April 2001

Guideline 14 (electricity) – Provision of services by electricity distributors

1

April 2004

Guideline 15 (electricity) – Connection of embedded generation

1

Aug 2004

Guideline 17 (electricity) – Electricity ring fencing

1

Oct 2004

Guideline 17 (gas) – Regulatory accounting information requirements

2

June 2008

GENERATION

Electricity System Code

1

Oct 2000

TRANSMISSION

Electricity System Code

1

Oct 2000

Guideline 18 (electricity) – Augmentation and land access

1

April 2005

Footnotes

  1. Australian Energy Market Commission. First Draft Report - Review of the Effectiveness of Competition in the Electricity and Gas Retail Markets (Victoria), October 2007.
  2. Council of Australian Governments. COAG Energy Market Review: Towards a truly national and efficient energy market, December 2002.
  3. Council of Australian Governments. COAG Amended Australian Energy Market Agreement, July 2009, July 2009.
  4. Note that issues concerning the transition from jurisdictional retail licensing to national retailer authorisation are to be handled at a national level by the MCE's Standing Committee of Officials.
  5. Note that the functions of the MCE are to be performed by the Standing Council on Energy and Resources (SCER) in future.
  6. Essential Services Commission (Victoria). Small scale licensing framework final recommendations, March 2007.
  7. Further action following the ESC's final recommendations was suspended pending implementation of the NECF.
  8. Section 33A of the EIA allows the Minister to revoke transmission company licences. Section 33A was introduced by the Energy Legislation Amendment (AEMO) Act 2009. The OIC revoking VENCorp's licence was made on 26/6/09 and published in Gazette S222 on 30/6/09.
  9. See: Rule 2.5.1 NER. Guidelines: Australian Energy Regulator. Network service provider exemptions guidelines, March 2005.
  10. See s. 8 of the Essential Services Commission Act 2001. Note that this objective post-dates the licensing regime itself, but informs its current administration.
  11. See s. 16 EIA and s. 22 GIA.
  12. Generally clause 2.2 of each licence.
  13. Ivan Png and Dale Lehman. Managerial economics. Blackwell Publishing, January 2007. p. 415.
  14. See ss. 88, 90 and 110 of the NERL respectively.
  15. See s. 17 EIA and s. 24 GIA. Note that the GIA also provides for an exemption from the requirement to obtain registration under the National Gas (Victoria) Law.
  16. Prior to the 2009 Order in Council (Government Gazette 2008 No. S 315) which lowered this threshold to 40 MWh/a pursuant to s. 35 of the EIA.
  17. Essential Services Commission (Victoria). Energy compliance strategy, November 2006.
  18. Note: In 2007, a voluntary formal clearance process was introduced for mergers which may address the concern regarding transparency of decision making. The formal clearance system enables an acquirer to apply to the ACCC for clearance of a proposed acquisition which, if granted, provides protection to the acquirer from legal action. Application may be to the Tribunal for review of the ACCC's merger clearance decision. Nevertheless, the substantive point made by the paper is still considered sound – that the preclusion of challenges to the ACCC's decisions via Victorian law is not an appropriate policy outcome.
  19. Department of Primary Industries (Victoria). Cross-ownership Rules for the Energy Sector Issues Paper, December 2004.
  20. Note that this is not the case where the law has been modified specifically to ensure that this does not occur, as has been provided in respect of AEMO and SP AusNet's transmission licenses.
  21. See s. 49D(5)(a) EIA.
  22. See definition of "RoLR event".
  23. Essential Services Commission (Victoria). 2008-09 Annual licence fee determinations - Licences and Fees, September 2009.
  24. Environment and Natural Resources Committee. Inquiry into the Approvals Process for Renewable Energy Projects in Victoria, February 2010.
  25. Essential Services Commission (Victoria). Small Scale Licencing Framework Issues Paper (Review of the Exemption Framework for Small Scale Activities), July 2006.
  26. Ewan Waterman, Prof. E W Russell and Dr Nicholas Seddon. Audit Review - Contracting, Privatisation, Probity & Disclosure in Victoria 1992-1999, May 2000.
  27. S. 34 & s. 41 respectively.
  28. Formerly Country Energy.
  29. See http://www.aemo.com.au/registration/elec_guidesforms.html
  30. 'Small scale' being defined by the 30MW capacity threshold observed in the NEM market registration requirements and the General Exemption Order.
  31. Australian Energy Market Commission. Final Report - Review of National Framework for Electricity Distribution Network Planning and Expansion, September 2009.
  32. Australian Energy Market Commission. DSP Review Stage 2 -  Final Report - Review of Demand Side Participation in the National Electricity Market, November 2009.
  33. Refer footnote 1.
  34. For information, the AER's proposed approach to this function is canvassed in: Australian Energy Regulator. Issues Paper - Approach to compliance with the national energy retail law rules and regulations, May 2010.
  35. Note that it may be that, on analysis, some matters are determined as suitable for public enforcement in VCAT and some are determined as requiring proceedings by a State body in the courts.