National Electricity Bill: federal regulation needs to be efficient

Hansard: 20 November 2007 ASSEMBLY

Mr CLARK (Box Hill) — The National Electricity (Victoria) Amendment Bill 2007 will amend the National Electricity (Victoria) Act 2005 to transfer responsibility for economic regulation of electricity distribution from the Essential Services Commission (ESC) to the Australian Energy Regulator (AER).

There are two main operative provisions of the bill. The first is to transfer administration of the regulation of electricity distributors from the ESC to the AER from a date to be determined but which is currently, we understand, to be from 1 January 2009; that transfer of administration will include the AER undertaking the next price determination to be carried out for electricity distributors in Victoria. The second main provision is to preserve the existing state-based regulatory regime for distributors until the end of the current price determination as at 31 December 2010 — that is, maintaining the current state-based rules, albeit administered by the AER. This will include a discretion for the minister to exclude the application of various aspects of the national regulatory regime until the end of the current price determination.

There are some amendments that were distributed a few moments ago by the minister, and I thank the minister and his office for the advance notice of those amendments. On a quick inspection it appears that the amendments as distributed are in the same, or close to the same, format as the advance copies provided to me and, on that basis, they appear to be technical and supportive of the main aims of the legislation.

The opposition supports the bill. There is a great irony in this bill, as indeed in a number of bills that come before the house these days in relation to the energy market — the irony of course being that these bills are to facilitate, extend and build upon the energy reforms that were pioneered in Victoria by the Kennett government.

It hardly needs me to tell you, Acting Speaker, that those reforms were at the time opposed tooth and nail by the then Labor opposition.

Time and again in this house the then member for Lara, Mr Peter Loney, stood up as energy spokesman and opposed the Kennett government’s legislation, on much of which I was assisting Treasurer of the day Alan Stockdale in my capacity as his parliamentary secretary. We were subjected to long diatribes about the ills and the woes that were predicted to flow from those reforms. I think the now Minister for Industry and Trade, the Honourable Theo Theophanous in another place, delivered even longer addresses — you may well recall them, Acting Speaker — to similar effect about the woes of the world, perhaps backed up by the gentleman who is now the honourable member for Melton!

Of course the members who fought these reforms tooth and nail have now seen the light, and indeed even the minister, a leading light in the Socialist Left faction of the Labor Party, is standing up and singing the praises of free market reform and the efficiencies and gains to be achieved from a smoothly operating market mechanism. He is pleased, as we are, that Victoria is pioneering the further opening up of the market here in Victoria and carrying forward the reform path that was started by Jeff Kennett and Alan Stockdale. We welcome the road-to-Damascus conversion of the minister and the support of the Socialist Left of the Labor Party for free market reforms. We have the irony that while the minister from the Socialist Left is an enthusiastic supporter of free market reform, we see others such as the Attorney-General, who is supposedly from the right faction, driving through this house some of the most damaging socialist and radical social legislation that Victoria has been subjected to for some time.

On our side of the house the Liberal Party has been very consistent in its support for the reform of the gas and electricity sectors, and it undertook that reform process when in government. It yielded enormous benefits to the state, both in terms of the sale proceeds that were achieved, which were applied to reduce the enormous levels of debt we inherited from the Cain and Kirner governments, but also in providing a very cost-competitive energy regime in Victoria. We have said all along that we supported the progressive transfer of the regulation of the gas and electricity sectors to a national level, as and when national institutions were developed that could undertake that regulation.

In any instance where there is a debate about whether or not regulation should best be carried out at a state or a federal level, there are competing considerations that need to be weighed.

In particular it can be said that dynamic efficiency — that is, the ability to make gains through change, through reform, through experimentation and through progress — may well occur more readily under a state regulatory regime where each state is free to undertake its own reforms and to blaze trails and let others learn from their experience, whether for better or for worse. I think it can well be said that the enormous reforms that have taken place in the national energy market here in Australia would not have occurred had it not been for the Kennett government being willing to go it alone on those reforms, regardless of other states. We proved by doing it here in Victoria that it was achievable and it was beneficial, and other states have to a greater or lesser extent followed suit.

It was a great tragedy that some years ago the New South Wales government, despite the support of the Premier and Treasurer, determined not to proceed with the sale to the private sector of large parts of that state’s energy industry.

I understand that it may be revisiting that question. In the meantime South Australia has put large parts of its energy sector into the private sector and other states have to a greater or lesser extent allowed an increased level of private sector participation in their energy markets. Within the context of an appropriate regulatory regime that sets clear rules and adequate protections for consumers and ensures that parties honour their contracts, do not engage in misleading and deceptive conduct, meet service standards, do not abuse their monopoly positions and a range of other criteria, the reformed regime is delivering enormous benefits. That is one of the clear arguments in favour of state-based as distinct from national regulation.

On the other side of the ledger, national regulation can be expected to deliver substantially better static efficiency than state-based regulation; in other words, you get efficiencies from uniformity because you do not have entities that are operating in multiple jurisdictions and having to comply with a large number of rules, and you can also hopefully get economies of scale in the regulatory process through having one national regulator rather than a multiplicity of state and territory regulators. That may also assist in attracting the best and the brightest in the regulatory field from around the nation to contribute to the one regulator. So you have these competing considerations. In each particular instance in whatever the field concerned is, be it economic, social or whatever, those considerations will have to be weighed up.

In the case of energy and many other sectors where substantial reform has been undertaken, probably the case for national uniformity increases as those reforms mature, as a degree of stability is achieved in the broad parameters of the regulatory regime, and as a degree of consensus is achieved. When that point is reached, then the remaining differences can impose a cost that is not matched by the benefits that can be gained from those differences between the jurisdictions. As I indicated at the outset, we have consistently expected that as the reform of the energy market matured that process would occur and the balance would tip in favour of national regulation. It is pleasing to see that these national institutions are being established. We have been very consistent in our approach and it is pleasing to see that those on the other side of the house have seen the merits of the policies that we have been holding for some time. Of course that does not mean that the transfer of regulation to a national level is a universal panacea that is going to solve all problems and free the state from all cares.

It will be important that the Australian Energy Regulator (AER) and the Australian Energy Market Commission continue to focus on achieving efficient and effective regulation and to capture those advantages of national uniformity and national regulation that I referred to earlier; and that the regulatory regime that they administer is as light handed as possible and gives scope to energy sector participants undertaking monopoly or quasi-monopoly functions to capture the fruits of innovation and efficiency improvements made ahead of the pack, while at the same time as the pack progresses and those reforms become more commonplace that those benefits accrue through to consumers. That was certainly the objective of what was commonly referred to as the CPI minus X regulatory model that was envisaged under the Kennett government.

The bill that is currently before the house is one step in an ongoing process of transfer of regulation from national to state level.

I would particularly commend to members a speech that was delivered just recently, on 13 November this year, by Mr Ed Willett, who is an Australian Competition and Consumer Commission commissioner and member of the AER, to the Energy 21C conference. The speech is entitled ‘Energy reform and the Australian Energy Regulator’. Mr Willett provides a very good overview of the process of transfer to the national level that has been under way over recent years. He points out that the central reforms that have kicked off this process began with the establishment of a national electricity market in 1999; and that in 2005 two national bodies were established: the Australian Energy Regulator and the Australian Energy Market Commission, with the Australian Energy Regulator to assume responsibility for the economic regulation of the NEM (national electricity market) energy sector on a staged basis.

The AER has been the regulator of the wholesale market and transmission networks in the NEM since July 2005.

The regulation of the electricity distribution, networks, gas pipelines and some retail functions will transfer from the states to the AER over the next 12 to 18 months. The bill before the house will facilitate Victoria’s part in the transfer of the regulation of electricity distribution networks. The AER has been set up with the objective of promoting investment in an efficient use of electricity services for the long-term interests of consumers of electricity with respect to price, quality, reliability and security of supply of electricity, and the reliability, safety and security of the national electricity system.

The AER is already undertaking regulation of substantial parts of the national energy market. In the electricity wholesale market it is monitoring the compliance of participants with the national electricity law and rules, as well as undertaking any necessary prosecutions for breaches.

It is also regulating electricity transmission networks under a framework that is set out in the national electricity rules. Gas pipelines are being regulated under the national gas code. There are a number of legislative reforms being introduced by various jurisdictions to streamline the national regulatory framework, including a new national gas law and amendments to the national electricity law, and there will be a set of rules sitting beneath each of those laws.

The Ministerial Council on Energy expects that the transfer of energy network regulation to the AER will be completed by late this year, and there is legislation going through the South Australian Parliament to which the Victorian bill before us is complementary. Further down the track it is intended that there will be a second tranche of legislation that will transfer some retail functions to the AER, covering non-price areas such as consumer protection and issues such as the administration of the retailer-of-last-resort arrangements. However, the regulation of retail prices is going to remain with state and territory jurisdictions, unless they choose to transfer that role.
The AER is already gearing up to undertake the first electricity distribution reviews under the national arrangements, including for New South Wales and the Australian Capital Territory in 2009, and for Victoria it is gearing up to replace the current price determination when it expires at the end of December 2010. The upshot of the reform process is going to be that once the new legislation is in place the AER is going to be responsible for regulating the prices of over 40 nationally significant businesses.

At the peak of its review work in 2010, Mr Willett expects that the AER will simultaneously review around 12 network businesses.

There is also a range of further reforms in train at the moment which are attempting to achieve a consistent national approach to energy regulation in order to reduce regulatory costs and an uncertainty to business. A further piece of reform that is going to be put in place — another piece in the jigsaw — is the decision by COAG (Council of Australian Governments) to establish a national energy market operator by 2009, which in addition to taking on the current responsibilities of NEMMCO and various gas market functions is also going to include a national transmission planning function for electricity.

So the pieces of the jigsaw are slowly being put in place for the transfer of regulation to a national level.

However, there are a number of challenges that the energy sector is facing and is likely to continue to face under the national regulatory regime of which this legislation forms part. I suppose the overwhelming and dominant issue that is going to be on the agenda over the next few years is the implementation of a national emissions trading scheme and the consequences that is going to have for the energy sector, among many others, but there are already challenges that are being faced.

Although the liberalisation of energy markets has led to substantial new investment in the sector around Australia, there are pressures on the system. As Mr Willett pointed out in his speech on 13 November, there have been sharp rises in wholesale prices due to the effects of drought on hydro-generating capacity and the on availability of water for cooling in some coal-fired generators.

Mr Willett also referred to flooding in the Hunter Valley which affected some capacity, and I think it has been subsequent to his speech that we have had the recent flooding in Victoria which has caused significant disruption to Victoria’s generating capacity. As Mr Willett has pointed out, these various factors are contributing to an extremely tight supply-demand balance and much higher forward prices as well as spot market prices that have put pressure on various retailers. There have been two exits or instances of scaling down the market presence by retailers, including Energy One withdrawing from the market and triggering a retailer-of-last-resort event, and Momentum Energy divesting most of its small customer contracts.

There are some particular factors which have been affecting the supply-demand balance in Victoria, especially on the supply side.

Under the Kennett government reforms there was an enormous increase in the efficiency of Victorian generating plant, to the extent that availability factors rose remarkably to levels that had never previously been contemplated as being capable of being achieved. That huge surge in efficiency postponed for a number of years the need for investment in additional power plant, and that in turn saved hundreds of millions of dollars in cost to energy users.

Over time we have had natural growth. We have also had a very strong economy at the national level that has been produced by the Howard government. We have had rising standards of living which have meant that consumers who have become willing and able to afford air conditioners have installed them. That has led to a further demand for extra capacity, due particularly to the fact that air conditioners kick in at peak times on very hot summer days, and that creates a spike in demand.

Victoria has also suffered from industrial relations disruptions at a number of our generation plant projects, particularly those at Somerton and Laverton, and there have been planning delays and complications as well. Those factors have added significantly to the costs of the construction of generating plant in Victoria. It has made companies wary of undertaking investment in further plant. That is not to say that investment does not occur, because there is a point reached where, despite those extra costs and delays that companies have to factor in, nonetheless it would be a positive return for them to invest. But making those decisions is causing delays, because the returns have to be that much higher to overcome these costs and delays before a decision to invest is triggered.

The situation has also been compounded in Victoria by the mismanagement of the drought and the water supply problems that Victorians have suffered. This has been a consequence of the inadequate response to the drought by the Bracks and Brumby governments. Not only has that caused great grief in relation to water and the lack of water, but it is also putting pressure on prices and reducing capacity in the electricity sector. We are under an increasing risk of power shortages if there are untoward events. Views and assessments differ as to how much capacity there is in the system and how much ahead of demand we are projected to be.

But whatever the projections about capacity are on paper, if some event happens such as the disruptions to the transmission lines that we saw last summer or the recent flooding, then that capacity can be quickly taken offline.

That puts Victoria at risk of power shortages and blackouts. We saw uncontrolled blackouts in the 1999-2000 summer, when the Bracks government grossly mishandled the outages that took place at that time and saw Victoria have random, unforeshadowed blackouts across the suburbs. In contrast South Australia was able to manage equal levels of outages in a far better way due to its better capacity to govern and its better understanding of how the energy market works.

Therefore we can have the sorts of problems that Victoria suffered at that time or we can have imposed and regulated power restrictions if there is some forewarning of the problem. Either way it would be a very unsatisfactory situation to be in, and I think both the Bracks and the Brumby governments have been very complacent about some of the power supply threats we face and also about some of the building pressures which are going to drive up power prices in the future.

We need a stable regulatory regime not only in Victoria but nationally. Whatever regulatory capacity the state government retains for the energy sector, we need effective regulation in Victoria. We need to avoid tying up the sector in excessive regulation. In addition we need to ensure that the state has a stable industrial relations regime and that we do not get a repeat of the disruption that has been experienced in power plant construction in the past, which has caused grief and hesitancy for companies investing in the Victorian energy market.

That risk shows the dangers Victoria would face if there were to be a change of federal government, if the unions were to be back in town with a vengeance with a ‘Get square time’ campaign or other disruption, if the Australian Building and Construction Commission were to be abolished and if we were to head back to the bad old days of the construction industry.

We will also suffer if legislation at state government level such as the Equal Opportunity Amendment (Family Responsibilities) Bill is passed and causes enormous difficulties for Victorian employers.

There are many challenges ahead of the energy sector in Victoria. This bill before the house is a worthwhile step towards an effective national regulatory regime. On that basis, the opposition is pleased to support the bill.