Northern Territory Second Reading Speeches
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ELECTRICITY REFORM BILL 1999
(This an uncorrected proof of the daily report. It is made available under the condition that it is recognised as such.)
Mr REED (Treasurer): Mr Speaker I move that the bills be now read a second time. This package of legislation gives effect to the revised arrangements to apply to the Territory’s electricity supply industry that I detailed in the Assembly last month.
Fundamentally, the government’s reforms involve:
Wherever possible, allowing competition (or contestability — the threat of competition); and
Where monopoly remains, strengthening regulation to encourage competitive-like outcomes.
The package of legislation now before the Assembly is the culmination of a complicated process which the government has had to ensure it got right, because the ramifications of failing to properly implement reforms in an industry like electricity supply are immense. This process started nearly two years ago when the government initiated a strategic review of the Power and Water Authority (PAWA). Our objective was to identify the most effective approach, in the Territory context, to reducing the cost of electricity. A comprehensive review of the options available for improving PAWA’s performance was undertaken for the government in mid-1998 by consultants Merrill Lynch and Fay, Richwhite.
In response to the recommendations of that review, in November 1998 the government took a number of landmark decisions:
To introduce competition for non-domestic electricity customers once a regulatory regime has been established;
To develop a regime for applying economic regulation to electricity, water and sewerage services in the Territory;
To commence the process of separating regulatory and policy functions from PAWA;
To establish a $30 million per annum financial improvement target for PAWA, to be achieved in full over a three year timeframe; and
To initiate the phased reduction of commercial tariffs, …
Mr Stirling interjecting.
Mr REED: Look, you couldn’t even get your own MPI up, so we know how organised you are. Try and get your MPI up, get organised.
Mr Stirling interjecting.
Mr REED: … to be funded from operational savings, to eliminate the incentive for ‘cherry picking’ of large customers in the new competitive environment.
While the measures preparing PAWA for competition were implemented immediately, competition had to await design of market and regulatory arrangements to give effect to effective competition. That necessary design work has now been completed, as is evidenced by the bills I have introduced today. Together, these bills remove, to the maximum extent appropriate in the Territory, PAWA’s effective monopoly over the supply of electricity. The bills also establish the basis upon which competition among generators and retailers can be phased-in:
Firstly, by allowing certain customers to become ‘contestable’—and so free to choose their power supplier;
Secondly, by licensing new suppliers to enter the market; and
Thirdly, by facilitating access to PAWA’s networks which, of necessity, are to remain a monopoly function.
In areas of the electricity industry where monopoly will persist or competition will be weak, the bills seek to strengthen regulatory administration within government by the creation of a Utilities Commission. The Utilities Commission will administer certain economic regulation functions at arm’s length from the government. The Commission will provide independent and authoritative advice on matters such as pricing, network access, service quality and security of supply. Together, increased competition and strengthened regulation will provide PAWA with the incentive to become more efficient, and will enable efficient operators to enter the market. This should translate into lower costs and lower average electricity prices, to the benefit of consumers. Competition should also deliver significant benefits over time to Territory taxpayers, and enhance business competitiveness and employment prospects throughout the Territory.
I now turn to the nature and objectives of the various bills.
Electricity Reform Bill 1999: This bill will replace the existing Electricity Act. The existing act entrenches PAWA’s effective monopoly and grants PAWA regulatory and policy as well as commercial powers. The bill puts in place arrangements to facilitate competition and more appropriately assign regulatory responsibilities within government. In particular, the Electricity Reform Bill establishes the framework to allow certain end-use customers to become contestable (that is, to have choice of supplier). The bill does not define contestable customers, as this will be prescribed in regulations. The government’s intention is that only larger customers (that is, those with annual consumption at a single supply point of at least 750 megawatt-hours) will become contestable over time, commencing on 1 April 2000 with those with an annual consumption of at least 4 gigawatt-hours. The government intends to leave any decision on extending access below 750 megawatt-hours until closer to the time. Much will depend upon the experience of the states in extending competition to smaller customers, as well as how well the changes involving larger customers are bedded-down in the Territory.
I will now outline in general terms the important changes targeted by the Electricity Reform Bill.
Licensing: The bill provides for separate licences to be issued for each of the three main activities involved in the supply of electricity, namely:
Generation: the right to produce and generate electricity;
Networks: the right to operate the network system within a specified geographical area; and
Retail: the right to trade in electricity and to sell electricity to final customers.
Some retail licences will be issued with an obligation to supply non-contestable customers in a defined geographical area, as well as contestable customers anywhere in the Territory. This will see most non-contestable customers continuing to be supplied by PAWA. Other retail licences will be issued granting the right to supply contestable customers anywhere in the Territory. It should be noted that the granting of a retail licence will be necessary, but not sufficient, for the licence holder to use PAWA’s networks. Also required will be a negotiated access agreement with PAWA, which PAWA must negotiate consistent with the requirements of the network access code proposed under the Electricity Networks (Third Party Access) Bill. The Electricity Reform Bill assigns to the utilities commission the licensing of participants in the industry, and the monitoring and enforcing of compliance with the licensing regime. The Utilities Commission is to be established by the Utilities Commission Bill, to which I will turn shortly. Licences will only be issued to applicants meeting certain safety, prudential and capability conditions. All licences issued will require industry participants:
To comply with certain technical codes — dealing predominantly with technical and service delivery requirements (for example, relating to metering, connection to networks, system control and security);
To ‘ring-fence’ their monopoly from their contestable activities, requiring them to have separate accounting and information systems and precluding them from cross-subsidising between monopoly and contestable activities; and
To submit, where applicable, to price regulation.
It will be an offence for a licensee to contravene a condition of its licence. Such a contravention will render the licensee liable to a maximum penalty of $250 000 and to the possible suspension or cancellation of its licence. Each licensee will pay an annual licence fee. The fee will be fixed by the minister to recover a reasonable proportion of the costs of administering the Electricity Reform Act. The fees will be paid into consolidated revenue.
System control: Under the bill, the entity responsible for system control of the power system will be required to hold a system control licence. In the Darwin-Katherine system, for example, this is likely to see PAWA continuing to perform the system control function. The system controller will be given a broad power to issue directions to electricity operators for reasons of public safety or the security of the power system. At the same time, the system controller will be obliged:
To exercise its functions and powers in the best interests of all parties operating in the power system; and
To consult with all electricity operators involved in the power system when establishing and varying protocols and arrangements for dispatch and system security.
Price regulation: The Electricity Reform Bill requires the Utilities Commission to administer price regulation in the territory’s electricity supply industry. Under the bill, the Utilities Commission is empowered to regulate:
The prices for network services, in line with the provisions of the Network Access Code; and
The prices at which electricity is sold to non-contestable customers, in line with an ‘electricity pricing order’ to be issued under the act by the minister.
The government intends to issue an electricity pricing order that will regulate the prices payable by non-contestable customers. The impact of the GST aside, domestic customers will continue to benefit from a price freeze until July 2002, and can look forward to real-terms price reductions after that. For non-contestable commercial customers, the government will set the maximum permitted year-to-year movement in average prices. Within limits established by the government, PAWA will be able to adjust tariffs between commercial customer groups so long as tariffs are structured in an equitable and cost-reflective manner. Within the revenue cap set by the government, the Utilities Commission will approve PAWA’s proposed tariff schedules. To prevent unacceptable price shocks to particular commercial customer groups, the government’s electricity pricing order may establish ‘side-constraints’ on the extent of tariff re-balancing within any single year. The side-constraints would limit annual movements in retail tariffs for particular customer groups (by sector or by region). The sanctions for breaching either the electricity pricing order or a pricing determination of the utilities commission will be severe. The maximum financial penalty proposed is $250 000. In addition, the offending operator’s licence may be suspended or cancelled and any profits that result from the contravention may be confiscated.
Power system monitoring and planning: Responsibility for system augmentation and planning will not be left entirely to the market. The Electricity Reform Bill requires the Utilities Commission to monitor prospective electricity load growth, and to advise the government on matters relating to future reliability and capacity of the Territory’s power system.
Other: Another feature of the Electricity Reform Bill is that it provides for an electricity safety regulator to be responsible for monitoring and regulating safety and technical standards with respect to electricity installations. The safety regulator already exists within the Department of Industries and Business. The bill makes the safety function more explicit than under the existing act. The bill also assigns certain powers previously granted solely to PAWA, namely:
Those to ‘electricity officers’, that is officers of all licensed electricity operators who need certain powers for operational requirements; and
Those to ‘authorised officers’, that is officers with enforcement roles, either on behalf of the electricity safety regulator (for example, electrical inspectors) or the Utilities Commission.
Finally, the Electricity Reform Bill provides for parties who are dissatisfied with a decision of the Utilities Commission in relation to licensing, or with a decision of the electricity safety regulator, to have that decision reviewed initially by the relevant regulator and subsequently by the supreme court.
Power and Water Authority Amendment Bill (No. 2) 1999: The PAWA amendment bill involves changes that are necessary to the Power and Water Authority Act as a consequence of the provisions of the Electricity Reform Bill. Firstly, it removes all policy and regulatory matters from the list of PAWA’s functions, with only commercial functions to remain. Secondly, it removes PAWA’s ability to make by-laws—a power that is inappropriate for a commercial entity operating in competitive markets.
I now wish to turn to the Electricity Networks (Third Party Access) Bill. This bill sets out the basis upon which new players in the electricity industry will have access to PAWA’s networks, by entering into access agreements and paying regulated network charges. As competition involves transporting electricity from generators to final customers, arrangements for third-party access to PAWA’s wires are critical. The head legislation provides for the observance and enforcement of an access code, which is a schedule to the bill. To enable third-party access to PAWA’s networks to be up and running on 1 April 2000, the government will be giving effect to the preparatory provisions of the code from today. In the lead-up to 1 April next year, this will place obligations on PAWA and the industry regulator (mainly in the area of establishing and publishing network prices prior to 1 April).
As I have separately announced, until the Utilities Commission is established by passage of its legislation, I have appointed an interim Utilities Commissioner to undertake the duties envisaged for the industry regulator under the code. To provide certainty for new suppliers and for PAWA, the government will be applying to the national competition council for certification as to the effectiveness of the code in terms of part IIIA of the Commonwealth Trade Practices Act. The bill contains a provision authorising the regulatory minister to amend the code by notice in the gazette. This is similar to the arrangements in place in other jurisdictions. This provision is made to facilitate any changes flowing from negotiations with the national competition council after the bill is passed. Even after the national competition council has certified the regime, this provision will enable the code to evolve with experience and as commercial circumstances change. All such changes will be subject to the oversight of the national competition council. Initially, the access code will only govern access to PAWA’s networks.
The head legislation also includes a provision for the access code to apply eventually to the Darwin-Katherine transmission line and any other prescribed networks. However, this is to occur only:
After the code is reviewed to take into account the characteristics of privately-owned networks where these differ from those of government-owned networks; and
After the code has been re-certified by the NCC as ‘effective’ for this purpose under part IIIA of the Trade Practices Act.
The bill prevents the government from giving any directions to the utilities commission that would have the effect of compelling the regulator:
To suppress or vary determinations or approvals required by the code; or
In any other way to adopt a course of action that may directly affect the terms and conditions under which network users or individual contestable customers have access to electricity networks.
The code itself sets out the respective rights and obligations of ‘network providers’ and ‘network users’. ‘Network users’ refer to generators, retailers or individual contestable customers who have formal access agreements in their own right with a network provider.
Obligations on network providers. The code will oblige network providers:
To use all reasonable endeavours to accommodate the requirements of those seeking access to the electricity network; and
To provide access on a non-discriminatory basis between various network users and potential users.
PAWA networks will be ‘ring-fenced’ from the rest of PAWA, and required to keep separate accounts and records.
Obligations on network users. The principal obligations placed on network users by the code are:
To match their transfers of energy into the network to the demand profile of their customers as a group (with mismatches attracting a regulated charge);
To make adequate standby power arrangements; and
To comply with a technical code to be issued by the network provider regarding connection to, and use of, the electricity network.
Negotiating ‘access agreements’. The code details the processes to be followed by all parties in negotiating and concluding access agreements. The code also sets out procedures to be followed in the case of an access dispute. In the event of a dispute, an access applicant will be able to request the industry regulator to refer the dispute to arbitration.
Regulation of access prices. As to the regulation of access prices, the code requires the utilities commission:
To determine the annual cap or limit on the network provider’s total revenue;
To oversee the network provider’s setting of ‘reference’ (or maximum) tariffs for use of the network;
To oversee the network provider’s setting of capital contributions; and
To oversee PAWA generation’s setting of prices charged for out-of-balance energy.
The code requires that price regulation be administered to achieve:
Reasonable certainty and consistency over time;
An acceptable balancing of the interests of network providers, network users and the public;
An environment which fosters efficient operating and maintenance practices within the network sector, the efficient use of existing infrastructure and an efficient level of investment within the network itself; and
Promotion of competition in upstream and downstream markets.
The final bill in this package of legislation is the Utilities Commission Bill. This bill establishes a Utilities Commission to regulate monopoly elements of designated industries in the Northern Territory. The Utilities Commission is being established by way of separate legislation so as to enable it to be given responsibility, not just for the electricity supply industry, but for other monopoly-type industries parliament may consider appropriate to be regulated in the future.
The Utilities Commission is to be a body corporate constituted of a person appointed as the Utilities Commissioner by the Administrator. The Utilities Commission is a cornerstone of the proposed reforms of the Territory’s electricity supply industry. It is also required for the Territory to obtain certification of the proposed Network Access Code through the National Competition Council. The bill that I have introduced sets out the functions of the Utilities Commission and the powers it may exercise in performing those functions.
The key functions of the commission, in relation to industries regulated under relevant industry regulation acts, are to be as follows:
To regulate prices charged by government monopoly businesses and regulated industries;
To perform licensing functions;
To develop, monitor and enforce compliance with, and promote improvement in, standards and conditions of service and supply;
To make, and to monitor the operation of, codes and rules relating to the conduct or operations of the industry or licensed operators; and
To investigate, and help resolve, complaints made by contestable customers or competitors relating to the conduct or operations of licensed operators.
The Utilities Commission will also be required to advise the government on emerging issues in regulated industries, notably where arrangements may not be working as effectively as planned in achieving the outcomes targeted by the government. This will be achieved not only by an annual reporting process, but also by the commission being charged with reporting to the government as and when issues of significance arise. In exercising its powers and carrying out its functions, the utilities commission will be obliged to have regard to the need:
To promote competitive and fair market conduct;
To prevent the misuse of monopoly or market power;
To facilitate entry into relevant markets;
To promote economic efficiency;
To ensure consumers benefit from competition and efficiency;
To protect the interests of consumers with respect to reliability, quality and safety of services and supply;
To facilitate the maintenance of the financial viability of the industry; and
To ensure an appropriate return on public sector assets.
It is important for the Utilities Commission to be independent from the government with regard to those regulatory determinations that directly affect network users or individual contestable customers. New industry participants require an independent Utilities Commission to ensure that any regulation which may impact upon their competitive position is not subject to day to day political considerations. In addition, independence is required for the purpose of certification of the access regime under the Trade Practices Act. This bill addresses the independence of the Utilities Commission by providing that:
The Utilities Commission is not to be subject to ministerial direction in the performance of its functions; and
The Utilities Commissioner is to be appointed for a fixed term, and only subject to dismissal before the end of that term on account of misconduct or incapacity.
In addition, to ensure that the Utilities Commission is, and is seen to be, an effective regulator, it will be given the power to make orders requiring compliance with its pricing determinations. The commission will also be able to suspend or cancel the licence of an electricity industry participant where that participant is in breach of its licence conditions. This independence does not make the Utilities Commission unaccountable. The bill makes provision for certain decisions of the Utilities Commission to be reviewed at the request of an affected person and then, if necessary, to be appealed to the Supreme Court.
Mr Speaker, together these bills implement the government’s proposed reforms to the Territory’s electricity supply industry. I recognise that the bills contain some complex provisions. I am nevertheless confident that they will achieve the government’s aim of ultimately reducing power costs in the Territory, while protecting taxpayers’ investment in PAWA and providing a stable environment within which the private sector can operate.
I commend the bills to the Assembly.
Debate adjourned.
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