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Australia – Network Privatisation – The Future For Queensland?

8 December, 2012

 

Legal News & Analysis – Asia Pacific – Australia – TMT

 

In brief

 

The Newman Government is currently developing Queensland’s first 30 year electricity strategy. The key focus of the electricity strategy is to reform Queensland’s electricity sector to address rising electricity costs.

 

To this end, the Inter-Departmental Committee (“IDC“) on Electricity Sector Reform was established to make recommendations to the Queensland Government on how to reform the electricity sector to ensure that:

 

a) electricity is delivered in a cost-effective manner for consumers and in a financially sustainable manner for the Queensland Government; and

b) Queensland has a viable, sustainable and competitive electricity industry.

 

Pursuant to its terms of reference, the IDC engaged the Independent Review Panel on Network Costs (the “Panel“) to prepare a report outlining options to address the impact of the development of the electricity network in Queensland on rising electricity costs. On 24 November 2012, the Panel released its Interim Report – Summary Findings and Draft Recommendations (the “Interim Report“).

 

Much of the Interim Report focuses on cost saving measures to be introduced by Queensland’s network service providers to reduce the operating costs of the Queensland Government. This update, however, focuses on the recommendations of the Panel in the Interim Report that will affect large electricity users and industry in Queensland.

 

The Interim Report is to be finalised in early 2013, with the final 30 year electricity strategy expected to be released in mid-2013.

 

Distribution Network Service Providers

 

In Queensland, there are two Distribution Network Service Providers:

 

a) Ergon Energy Corporation Limited, which owns and operates the electricity distribution networks in regional Queensland and north-west Queensland, as well as a number of isolated networks in remote areas; and

b) Energex Limited, which owns and operates the electricity distribution network in south-east Queensland,

 

(together, the “DNSPs”).

 

In order to drive efficiency and reduce the overhead expenses of the DNSPs, the Panel recommends a number of changes to the structure and operation of the DNSPs. Such recommendations include the divestment of Ergon’s forestry land holdings, a reduction in expenditure on consultants, changes to the remuneration of employees and partnerships with the private sector for activities ancillary to the core network business.

 

The Panel also recommends the establishment of a new holding company for the DNSPs, to consolidate corporate governance and streamline the operations of the DNSPs.

 

Significantly, the Panel concluded that in light of the above, there is a compelling case for the privatisation of the DNSPs.

 

Unregulated transmission assets

 

In the Interim Report, the Panel noted that there is currently limited competition for the construction of connection assets, extensions and associated infrastructure in Queensland; resulting in high cost and delays in delivering large customer connection works.

 

On this basis, the Panel concluded that the Queensland Government should institute reform to encourage competition and private sector investment in unregulated transmission assets.

 

Specifically, the Panel made the following recommendations:

 

a) land access: that the Queensland Government ensure appropriate land access arrangements are available to the private sector to enable the construction of transmission lines. In particular, that the private sector be able to acquire easements along the route of proposed new transmission lines; and

b) provision of information: that the Queensland Government prepare and publish a Regulatory Statement to clearly describe the licensing and approvals required to construct electricity supply network infrastructure in Queensland, with a particular emphasis on the requirements under the National Electricity Rules (the “Rules“).

 

Notably, the Interim Report was silent as to the privatisation of Powerlink, Queensland’s only transmission network service provider.

 

Network security

 

Consistent with the general “de-regulation” theme of the Interim Report, the Panel recommends that the N-1 condition in Powerlink’s Transmission Authority be replaced by minimum performance standards to be met on a best endeavours basis. The Panel concluded that this would enable Powerlink to undertake a cost- benefit approach to any proposed capital expenditure. Further, the Panel recommends that the Powerlink board (as opposed to the Queensland Government) be responsible for developing, for approval by the Australian Energy Regulator, a program of works to adequately meet and manage system demand. Similarly, the Panel recommends that the DNSPs take on responsibility for determining the security standards necessary to deliver reliable supply of electricity. To this end, the Panel recommends that the minimum service standards in the Electricity Industry Code be incorporated into DNSPs’ Distribution Authorities so that systemic failures by the DNSPs to meet these standards will constitute a breach of their authorities.

 

Network regulation and planning

 

National Electricity Rules

 

The Panel noted that the regulatory framework that governs electricity networks in the east coast of Australia is complex and voluminous.

 

To address this, the Panel recommends that the Queensland Government seek the agreement of the Standing Council on Energy and Resources to review the Rules, with a view to streamlining the Rules to reduce regulatory complexity and the cost of compliance.

 

In the Interim Report, the Panel further recommends the establishment of a materiality threshold for rule change requests, such that the proponent for a rule change must demonstrate that the change will result in a clear and demonstrable material benefit to the operation of the National Electricity Market (“NEM“).

 

Separation of the AER from the ACCC

 

In the Interim Report, the Panel noted its concern regarding the current approach of the Australian Energy Regulator (“AER“) in relation to making revenue determinations for network service providers. The Interim Report goes on to suggest that the cause of this issue is a capability shortfall within the AER, which the Panel found to be symptomatic of the AER being part of the Australian Competition and Consumer Commission.

 

In light of the above, the Panel recommends that the Queensland Government argue for a strong and independent energy regulator, by promoting the separation of the AER from the ACCC.

 

However, given that the AER is constrained by the Rules in making revenue determinations, it would be seem that a change to the Rules themselves would be more likely to address the concerns identified by the Panel.

 

We note some of the Panel’s concerns may be addressed by the recent Rule changes effected by the Australian Energy Market Commission in respect of the economic regulation of network services.

 

 











For further information, please contact:

 

Paul Newman, Partner, Ashurst

paul.newman@ashurst.com

 

Denva Poyntz, Ashurst

denva.poyntz@ashurst.com

 

Teresa Scott, Ashurst

Teresa.scott@ashurst.com

 

 

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