Operational Ring Fencing for the SA Electricity Supply Industry

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                             DRAFT REPORT

                                          July 2002

Level 8 MAC Building          50 Pirie Street Adelaide SA 5000             GPO Box 2605 Adelaide SA 5001
  Ph: 08 8463 4444     Fax: 08 8463 4449       E-mail: saiir@saiir.sa.gov.au    Web: www.saiir.sa.gov.au
                                                                                               Draft Report
                                                             Operational Ring Fencing Requirements for the
                                                                              SA Electricity Supply Industry


 1. Introduction                                                                                          1

 2. Submissions Received                                                                                  4

 3. SAIIR response to Submissions                                                                         5

 4. Objectives of Ring Fencing Guideline                                                                  8

 5. Content of SAIIR Ring Fencing Guideline                                                              11

    5.1 Restrictions on Holding Other Electricity Licences                                               11

    5.2 Information Flows                                                                                12

    5.3 Provision of Goods and Services on a Non-discriminatory Basis                                    14

    5.4 Separation of Marketing and Operations Staff                                                     14

    5.5 Waiver of Obligations                                                                            14

    5.6 Compliance Procedures                                                                            15

    5.7 Transitional Arrangements                                                                        15

 6. Next Steps                                                                                           17

 Attachment 1: Submissions on Operational Separation in the Market for Design and Construction of
 Network Extensions                                                                           19

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                                                                                   Operational Ring Fencing Requirements for the
                                                                                                    SA Electricity Supply Industry

In May 2001, the SA Independent Industry Regulator (SAIIR) released a discussion paper
concerning the need for additional operational ring fencing within the SA electricity supply
industry (ESI).1 The discussion paper canvassed the intent of the SAIIR to develop a
Guideline for the implementation of operational ring fencing, and raised a number of
issues under consideration by the SAIIR in the development of such a Guideline. The
Guideline would complement existing ring fencing arrangements in the SA ESI by
establishing some operational controls which would seek to limit the ability of monopoly
businesses in the industry to inappropriately extend their powers into contestable markets
within that industry.

The Industry Regulator’s power to issue ring fencing guidelines is derived from certain
licence conditions and National Electricity Code (“Code”) provisions.

The distribution (ETSA Utilities), transmission (ElectraNet SA), system control (ElectraNet
SA) and franchise retail (AGL SA) licences each contain a condition imposing the
following requirements2:

▲      A requirement to keep the licensed business separate from any other business
       operated by the licensee or by any other person, in a manner and form approved by
       the Industry Regulator. This draft report and draft Operational Ring Fencing Guideline
       (attached) specifies the manner and form of such proposed separation.

▲      The requirement to ensure that services provided to, or received from, other specified
       licensees are provided or received on a non-discriminatory commercial basis.

▲      The requirement to ensure that Directors of the licensee are not shared with other
       specified licensees.

▲      The requirement to maintain accounting records and prepare accounts according to
       specified principles. Such principles are outlined in separate Information Requirements
       Guidelines which have been issued by the SAIIR3.

1     “Operational Ring Fencing Requirements for the SA Electricity Supply Industry – Discussion Paper”, May 2001.
2   Refer Clause 10.1 of the Transmission Licence issued to ElectraNet SA, Clause 4.1 of the System Control Licence issued to
     ElectraNet SA, Clause 12.1 of the Distribution Licence issued to ETSA Utilities and Clause11.1 of the Retail Licence issued to AGL
3   Refer SAIIR Guideline No. 1: “Electricity Regulatory Information Requirements – Distribution” , SAIIR Guideline No. 2: “Electricity
     Regulatory Information Requirements – Retail Code Retailer”, SAIIR Guideline No. 3: “Electricity Regulatory Information
     Requirements – Transmission and System Control”.

These licences also contain a condition requiring compliance with rules made by the
SAIIR relating to the use of information acquired by the licensee.4 To date, the SAIIR has
not developed such rules. However, the draft Guideline addresses this issue in relation to
the transfer of certain information from a monopoly business to a contestable business
that may give the contestable business a commercial advantage over its competitors.

Section 6.20.1 of the National Electricity Code requires all Distribution Network Service
Providers to comply with Ring Fencing Guidelines developed by Jurisdictional Regulators.
The SAIIR has the role of Jurisdictional Regulator in SA for Code purposes. Distribution
Ring Fencing Guidelines may specify requirements for the accounting and functional (or
operational) separation of the provision of prescribed distribution services from other
distribution services.

Section 6.20.2 of the Code requires Jurisdictional Regulators to develop Distribution Ring
Fencing Guidelines in consultation with the ACCC (who are required under the Code to
develop Transmission Ring Fencing Guidelines) and other Jurisdictional Regulators.
Jurisdictional Regulators must consider the need for Ring Fencing Guidelines to be
consistent with those developed by other Jurisdictional Regulators. Consistency with the
ACCC’s Transmission Ring Fencing Guidelines and with ring fencing requirements of
other utility businesses should also be considered.

The Code sets out the matters that may be included in Ring Fencing Guidelines, including
provisions relating to legal, accounting and operational separation.

The May 2001 discussion paper sought public comment on a number of issues being
considered by the SAIIR in relation to the development of operational ring fencing
guidelines. These issues included:

           Are the existing ring fencing arrangements for the SA electricity supply
           industry sufficient? Which monopoly businesses (if any) should be the
           subject of additional operational ring fencing controls?

           There has been a focus amongst other jurisdictional regulators to address the
           need to ring fence electricity distribution and retail activities (which are still
           somewhat integrated activities in most jurisdictions). However, in SA there is
           significant legal and ownership separation, including between distribution and retail
           businesses. Nevertheless, there may still be some scope for monopoly licence
           holders to impair the development of contestable markets within the ESI. For this
           reason, it may be appropriate to establish operational ring fencing controls.

4   Refer Clause 18 of the Transmission Licence issued to ElectraNet SA, Clause 9 of the System Control Licence issued to ElectraNet
     SA, Clause 23 of the Distribution Licence issued to ETSA Utilities and Clause17 of the Retail Licence issued to AGL SA.

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                                                Operational Ring Fencing Requirements for the
                                                                 SA Electricity Supply Industry

The discussion paper considered the need for operational ring fencing to be
applied to the state’s major distribution business (ETSA Utilities), the system
control business (ElectraNet SA) and the non-contestable retail business (AGL
SA). Responsibility for regulation of the monopoly transmission business in SA
(ElectraNet SA) lies with the ACCC. A draft transmission ring fencing guideline,
which is intended to apply to ElectraNet SA’s transmission business, was released
by the ACCC in December 2001.

What activities conducted by ring fenced businesses should be the subject
of additional operational ring fencing controls?

The paper considered various monopoly activities which might be subjected to
operational ring fencing controls. Separation of distribution activities was
considered in the context of facilitating competition in the retail sector and other
contestable markets both inside and outside of the electricity supply industry.

What type of operational separation controls should be instituted to achieve
the stated ring fencing objectives?

The discussion paper proposed that an outcome based approach to ring fencing
may be more appropriate than a prescriptive approach in which each ring fencing
control would be specified in detail. Comments were invited on this proposal.

What, if any, limitations should be placed on the flow of information from a
ring fenced business to other businesses in order to achieve the stated ring
fencing objectives?

The discussion paper considered whether there should be controls around the flow
of information from a monopoly business to those parts of the business that
provide contestable services. The requirement for the monopoly business to
provide non-discriminatory access to information to competitors of its contestable
business segments was also explored.

Should the SAIIR be enforcing tight controls over use of staff by regulated
and competitive parts of the business?

A monopoly business may use some of its staff in both regulated and contestable
activities. This may create opportunities for the regulated entity that are not
available to other businesses, which may undermine competition.

The SAIIR received submissions in response to the discussion paper from the following

▲   AGL South Australia Pty Ltd

▲   Cowell Electric Supply Pty Ltd

▲   Ergon Energy
▲   ETSA Utilities

▲   National Electrical and Communications Association

▲   Origin Energy Ltd
▲   South Drilling Pty Ltd

▲   TXU Torrens Island Pty Ltd
▲   Urban Development Institute of Australia
▲   SA Treasurer

The major points made in submissions are summarised below:

▲   There was little support for further operational ring fencing between ETSA Utilities’
    distribution business and AGL SA’s franchise retail business. The existing legal,
    ownership and accounting ring fencing arrangements were considered sufficient. The
    costs of imposing additional requirements were seen to outweigh any benefits.

▲   There was little support for additional operational ring fencing of the system control
    business. Only one submission (Origin Energy) suggested that an operational ring
    fencing guideline should be developed for system control.

▲   Operational separation between AGL SA’s contestable and non-contestable retail
    activities was not considered necessary.

▲   Four of the ten submissions supported additional separation of ETSA Utilities’
    monopoly distribution business from its contestable business of designing and
    constructing network extensions (operated under the ETSA Field Services business
    unit). These submissions, which were mainly from competitors of ETSA Utilities in this
    contestable market, argued that present arrangements inhibit competition, and ring
    fencing is needed to curb ETSA Utilities’ market power in this area. A number of
    examples were provided to demonstrate the manner in which the contestable market
    is being undermined.

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                                                           Operational Ring Fencing Requirements for the
                                                                            SA Electricity Supply Industry

As indicated in the May 2001 discussion paper, the existing structural ring fencing within
the SA ESI is extensive. The legal and ownership separation of each of the major
regulated businesses goes well beyond that which exists in most other jurisdictions. Given
the current arrangements, the SAIIR believes that additional operational ring fencing is not
required between:

▲   ETSA Utilities’ distribution business and AGL SA’s retail business

▲   AGL SA’s franchise retail business and its contestable retail business

▲   System Control and other businesses.

It is considered that, in these areas, any operational ring fencing in addition to the current
ring fencing would impose costs on the businesses that would outweigh any public
benefits. The basis on which this conclusion was formed is explained below:

      Separation of distribution and retail activities

      ETSA Utilities and AGL SA are separate legal entities. ETSA Utilities, and its parent
      companies, do not have any interests in the retail business (and vice versa). There
      appears to be little incentive for the two organisations to collude in such a manner
      that would threaten competition in the electricity supply industry. Whilst both entities
      are located in the same building and share certain systems, the SAIIR is satisfied
      that the current arrangements provide adequate levels of separation. The SAIIR has
      determined that any additional, operational separation (eg. requiring separation of
      offices) would impose significant costs on both entities, which are unlikely to be
      matched by any corresponding benefits to the industry and consumers.

      Separation of franchise retail and contestable retail activities

      Given that, under the current contestability timetable in SA, Full Retail Contestability
      (FRC) will commence on 1 January 2003, the extent to which any benefits may
      result from operationally separating AGL SA’s franchise retail business from its
      contestable business is small. In addition, it is likely that the costs of imposing such
      a requirement would be large since there is close integration between the two
      activities. Therefore, consistent with comments made in submissions on this issue,
      the SAIIR has decided not to require any further operational separation of these
      activities. However, the SAIIR may reconsider its position on this issue if FRC in
      South Australia is delayed or if experience shows FRC does not result in
      competition developing and AGL SA uses its dominant position in the market

      System Control

      The activities of the System Controller are important to the conduct of the electricity
      supply industry. However, the extent to which the System Controller may impede
      competition appears limited. On this basis, and given the existing accounting
      separation requirements that apply to the System Controller, the SAIIR has not
      sought to impose any additional ring fencing obligations on the System Controller.

Whilst the SAIIR believes that no additional operational ring fencing is required for the
above activities, there are other activities within the ESI which may warrant further ring
fencing controls.

The SAIIR has taken the view that some level of operational separation is desirable
between ETSA Utilities’ distribution activities and other activities it may conduct in
contestable markets within the electricity supply industry. The activities undertaken by
ETSA Utilities to which such ring fencing might apply include:

▲   Electricity distribution network design and construction (eg for new customer

▲   Electricity infrastructure maintenance (eg for ElectraNet SA); and

▲   Electrical contracting work at customer installations.

A number of submissions have been received that suggest that operational ring fencing is
required between ETSA Utilities’ network business and ETSA Field Services. For some
time now, the SAIIR has been aware of possible competition issues in the market for
design and construction of network extensions. This review has brought together some of
these issues and the SAIIR considers it necessary to address each of these issues
seriously, given its legislative responsibility to promote competitive and fair market
conduct, prevent misuse of monopoly or market power and facilitate entry into relevant
markets, as specified in section 5(2) of the Independent Industry Regulator Act 1999.

The issues that have been raised in these submissions are summarised in Attachment 1.
The submissions suggest that ETSA Field Services has a competitive advantage over
participants in the network construction market as a result of its relationship with the ETSA
Utilities’ regulated distribution business. The submissions put forward a number of
proposals which, it is suggested, will provide for a more level playing field in this market.

It should be noted that the SAIIR is conducting a separate review on Chapter 3 of Part A
of the Distribution Code: Connections Requiring Network Extension and/or Augmentation.
Many of the concerns raised by participants in the network construction market may be
addressed through this review. Nevertheless, there are some issues that are more

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                                                        Operational Ring Fencing Requirements for the
                                                                         SA Electricity Supply Industry

properly dealt with through operational ring fencing and the SAIIR has sought to do so
through its draft Guideline. Detailed discussion on how the Guideline addresses this issue
is contained in section 5 of this paper.

The SAIIR also sought comment on the interaction between ETSA Utilities’ distribution
business and its activities in contestable markets outside of the ESI. There appears to be
a movement towards convergence between utilities, and it is foreseeable that ETSA
Utilities will seek to become active in other markets, eg. telecommunications. The
discussion paper sought comment on the role of the SAIIR in protecting competition in
industries, such as telecommunications, which the SAIIR has no regulatory role. Whilst no
submission responded directly to this question, the SAIIR considers that such an objective
is outside its jurisdiction. Nevertheless, the SAIIR does believe that it has a role in
ensuring that customers of ETSA Utilities are not adversely affected by ETSA Utilities’
activities outside of the electricity supply industry. For example, electricity consumers
should not be forced to cross subsidise activities outside of ETSA Utilities’ distribution

In addition, there is a question as to whether electricity customers should share in any
benefits enjoyed by ETSA Utilities through the use of regulated distribution assets in
unregulated activities or in industries outside the electricity supply industry (eg. revenues
received from allowing telecommunications infrastructure to be placed on electricity
distribution poles).

The SAIIR considers both of these issues to be of a financial nature rather than
operational and, hence, they are not addressed in the draft operational ring fencing
guideline. The SAIIR will give consideration to the manner in which these issues should
be addressed through the 2005 electricity distribution price review process. At present,
SAIIR Guideline No. 1 does require separate financial reporting of such activities.

In developing the draft Operational Ring Fencing Guideline, the SAIIR has attempted to
address each of the following important objectives:

▲       The Guideline should be consistent with the principles set out in section 5(2) of the
        Independent Industry Regulator Act 1999.5

▲       The public benefits of imposing additional ring fencing requirements should outweigh
        any administrative costs. It should be noted that many of the benefits that are likely to
        flow from ring fencing are difficult to quantify, and that an assessment of the net
        benefits is largely a subjective matter.

▲       The Guideline should recognise the extensive structural ring fencing that already
        exists in SA and the accounting separation requirements that have been imposed
        through Guidelines 1 to 3 issued by the SAIIR. The Guideline should not be
        inconsistent with or duplicate these arrangements.

▲       The Guideline should also be consistent with those developed in other jurisdictions
        and with those in other industries.

▲       The Guideline should be outcome-based and should give the relevant licensee some
        freedom to decide how best to meet the requirements. Submissions to the discussion
        paper generally supported an outcome-based approach, and the SAIIR agrees that
        this approach is more appropriate than a prescriptive approach.

▲       The Guideline should be enforceable. In this case, the proposed Guideline would be
        enforceable through the existing licence conditions described in section 1. A material
        breach of the Guideline constitutes a breach of licence, for which the Electricity Act
        1996 prescribes penalties.

▲       The Guideline should be flexible enough to accommodate changing circumstances.

▲       The Guideline should allow for some transition period to the new arrangements.

5   Section 5(2) requires the Industry Regulator to have regard to the following factors in performing its functions:
    -      promote competitive and fair market conduct;
    -      prevent misuse of monopoly or market power;
    -      facilitate entry into relevant markets;
    -      promote economic efficiency;
    -      ensure consumers benefit from competition and efficiency;
    -      protect the interests of consumers with respect to reliability, quality and safety of services and supply in regulated industries;
    -      facilitate maintenance of the financial viability of regulated industries.

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                                                    Operational Ring Fencing Requirements for the
                                                                     SA Electricity Supply Industry

▲   The Guideline should contain a mechanism for exempting the ring fenced entity from
    having to comply with an obligation in circumstances where the cost of meeting the
    obligation can be demonstrated to exceed any benefit.

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                                                            Operational Ring Fencing Requirements for the
                                                                             SA Electricity Supply Industry

As mentioned in section 3, the major concern emanating from submissions to the May
2001 discussion paper is the need for additional separation of ETSA Utilities’ network
business from its contestable construction business. The SAIIR agrees that this is an area
where competition can be enhanced through operational separation. There are, however,
other potential competition issues relevant to ETSA Utilities, which the SAIIR has sought
to address in the draft Guideline.

The draft Guideline contains operational ring fencing requirements for ETSA Utilities
relating to the following matters:

▲   The holding of electricity licences in addition to its distribution licence;

▲   Information flows to related businesses and other entities;

▲   Provision of goods and services to related businesses and other entities;

▲   Separation of staff.

5.1     Restrictions on Holding Other Electricity Licences
Vertical separation within the electricity supply industry was a key aspect of recent market
reforms, and it is important that reintegration of monopoly and contestable industry
segments is prevented from occurring. In particular, the SAIIR wishes to ensure that the
distribution business does not reintegrate with the competitive retail and generation
markets. Maintaining disaggregation in this area will continue to limit the incentive and
scope for the distributor to impede competition in the retail and generation sectors (eg by
using prescribed revenue to cross-subsidise contestable activities). It also has the benefit
of clarifying the task of regulating the distribution business.

The SAIIR proposes to include a provision in the Guideline preventing ETSA Utilities from
holding a retail or generation licence. While section 17(2)(ac) of the Electricity Act 1996
already prevents the Industry Regulator from issuing distribution and retail licences to the
same entity, the SAIIR believes that, in general, allowing ETSA Utilities to hold a
generation licence would compromise the promotion of competition in the SA generation

It should be noted that ETSA Utilities already holds a generation licence in SA for the
Kingscote power station at Kangaroo Island. This generator is designed to provide back-
up supply in the event that the 33kV line from the mainland to Kangaroo Island should fail.

On the basis that the generator is not considered to be in competition with other
generators, the SAIIR is comfortable in allowing ETSA Utilities to be licensed for this
generation plant.

Clause 3.1 does not prevent ETSA Utilities from holding both a distribution and
transmission licence. Distribution and transmission businesses are considered natural
monopolies for the supply of network services and, while it may be important to ensure
financial ring fencing of the two businesses, the benefits of requiring operational
separation are less obvious. Indeed, there may be scope for efficiencies in combining
certain activities from the two businesses.

It should be noted that the Transmission Ring Fencing Guideline developed by the ACCC
specifies that, in general, Transmission Network Service Providers are prohibited from
undertaking, among other things, distribution activities.6 The draft Guideline developed by
the SAIIR differs to the ACCC Guideline in this respect.

Clause 3.1 of the SAIIR draft Guideline removes the potential for certain reintegration to
occur, and thereby offers benefits in the form of increased certainty to market participants.
The clause will not create any additional costs for ETSA Utilities as it merely seeks to
prevent an undesirable event occurring rather than alter ETSA Utilities’ current behaviour.

5.2            Information Flows
ETSA Utilities is currently required, by condition of licence, not to disclose information
concerning a customer without the prior written consent of the customer7. Likewise, all
retail and transmission entities licensed by the SAIIR have a similar obligation.

The SAIIR is giving consideration to the requirements for the use and disclosure of
customer information by electricity retailers under Full Retail Contestability (FRC), to apply
from 1 January 20038. Attention is being given to the implications for retailers of the
National Privacy Principles, specified in the Privacy Amendment (Private Sector) Act
2000. The SAIIR is also considering the implications of the new privacy legislation on
distribution and transmission licence holders. In developing confidentiality arrangements
for retailers under FRC, the SAIIR may also seek to apply similar arrangements to
distribution and transmission licensees. This may be achieved through the issuing of a
separate code or by amending existing Codes or licences.

6   Refer clause1.1 of the ACCC Transmission Ring Fencing Guidelines, May 2002.
7   Refer clause 23 of ETSA Utilities’ Distribution Licence.
8   See SAIIR discussion paper: Electricity Retail Competition: Consumer Protection Issues for Small Customers, December 2001, pp

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                                                         Operational Ring Fencing Requirements for the
                                                                          SA Electricity Supply Industry

Establishing appropriate controls around the use of information pertaining to a customer is
an important issue for the SAIIR. However, this is not the only type of information that may
be sensitive and, hence, should be subject to certain controls. Some information held by
ETSA Utilities, which may or may not relate to a specific customer, might have material
commercial impacts in a contestable market in which ETSA Utilities competes. The SAIIR
considers it appropriate to address through the draft Guideline the manner in which this
information is to be used.

Examples of this type of information includes design and technical standards relating to
the distribution network and information concerning prices and availability of goods and
services supplied by ETSA Utilities to contractors.

Clause 3.2 of the draft Guideline requires ETSA Utilities to use commercially sensitive
information only for the purpose for which it was provided and to only disclose the
information to a related business or competitor of a related business in a non-
discriminatory commercial manner. This means that if the information is made available to
the related business, it should also be made available to its competitors on non-
discriminatory terms.

Key to this clause is the definition of “related business”. This term has been defined in the
Guideline so as to include any activities undertaken in the electricity supply industry by
ETSA Utilities, an Associate of ETSA Utilities or any of ETSA Utilities' servants,
consultants, independent contractors or agents, which is subject to effective competition,
as determined by the Industry Regulator from time to time. Hence, the obligations
specified in the clause apply not only to ETSA Utilities, but also to third parties conducting
such activities for ETSA Utilities under contract. The definition also gives the Industry
Regulator the flexibility to address any future changes to the mix of contestable and
monopoly services that the distributor may provide.

The Industry Regulator believes that the business of designing and constructing
distribution network extensions should be viewed as a related business for the purpose of
the Guideline. The general requirement to limit information flows to participants in this
contestable market is considered an important response to the apparent competition
issues that exist in that market. Clause 3.2 should address the concern that ETSA Field
Services has access to information that is not available, or is available on different terms,
to its competitors.

The SAIIR believes that imposing this requirement on ETSA Utilities will result in
significant benefits to this contestable market, benefits which will exceed the compliance
costs imposed on ETSA Utilities.

5.3    Provision of Goods and Services on a Non-discriminatory
Clause 3.3 of the Guideline acknowledges that the prescribed distribution business will
often be the sole supplier of goods or services to a related business and to competitors of
a related business. In these circumstances, it is important that the goods or services are
provided on non-discriminatory terms to ensure that the related business does not gain a
competitive advantage.

In the case of the contestable construction market, there are a number of services that the
distribution business provides to participants in the market, including ETSA Field Services.
For example, ETSA Utilities performs switching, accreditation and inspection services.
Usually, there is a cost for providing these services. In order to create a level playing field,
access to the services and the terms of their provision should not discriminate between
the entities to which they are provided.

5.4    Separation of Marketing and Operations Staff
The obligation placed on ETSA Utilities to keep marketing staff in its monopoly distribution
business separate from a related business participating in a contestable market is
considered an important step in ensuring that ETSA Utilities’ related business does not
obtain a competitive advantage, purely because of its status as a monopoly distributor.

The requirements specified in clause 3.4 of the draft Guideline is broadly consistent with
approaches adopted in other jurisdictions. Separation of marketing staff is commonly seen
as an important ring fencing control since marketers often have the greatest opportunity to
behave in an anti-competitive manner given their close relationship with customers.

Clause 3.4 also requires ETSA Utilities to ensure that operations staff that are shared
between the core distribution business and a related business are shared on a non
discriminatory, commercial basis. Operations staff are staff that are involved in the day to
day provision of prescribed distribution services. It is important that these staff are shared
on commercial terms, to ensure that the related business faces the true commercial cost
of obtaining the services of the prescribed business’ staff.

5.5    Waiver of Obligations
Clause 3.5 of the draft Guideline provides ETSA Utilities with an opportunity to apply to
the Industry Regulator for a waiver of any of the obligations specified in the Guideline in
specific circumstances. In deciding whether to waive certain obligations, the Industry
Regulator will have regard to the general factors listed in section 5(2) of the Independent

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                                                        Operational Ring Fencing Requirements for the
                                                                         SA Electricity Supply Industry

Industry Regulator Act 1999 and consider whether the costs of meeting those obligations
under a specific circumstance is likely to outweigh any benefits.

This clause is consistent with waiver provisions contained in distribution ring fencing
guidelines developed in other jurisdictions.

It is envisaged that ETSA Utilities would apply for a waiver from clause 3.1 of the
Guideline in respect to its generation licence for the Kingscote power station.

5.6    Compliance Procedures
It is important that the SAIIR obtain adequate assurance that ETSA Utilities is adhering to
the requirements of the Guideline. The SAIIR has developed a compliance system and
reporting scheme in relation to licence and Code compliance, through SAIIR Guideline
No. 4. This scheme requires licensees to report against compliance with specified licence
and Code conditions on a quarterly, annual and bi-ennial basis. The SAIIR generally relies
on internal audit processes rather than requiring independent auditing of compliance. It is
envisaged that a similar scheme be adopted for the auditing of compliance with the Ring
Fencing Guideline.

The Guideline contains an additional obligation for the reporting by ETSA Utilities of any
material breaches of the Guideline within 5 business days of it becoming aware of that

5.7    Transitional Arrangements
The draft Guideline provides for the establishment of a transitional period to the new
arrangements. It is acknowledged that some time will be needed before ETSA Utilities is
in a position where it can comply with the obligations contained in the Guideline.
Therefore, there will be a period of time after the Guideline is finalised before certain
obligations take effect. The duration of the transitional period will depend on the timing of
the issue of the Guideline.

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                                                      Operational Ring Fencing Requirements for the
                                                                       SA Electricity Supply Industry

Before finalising the Operational Ring Fencing Guideline, the SAIIR wishes to undertake a
further round of public consultation to obtain comments on this draft report. Interested
parties are invited to submit comments on the draft Guideline to the SAIIR. Submissions
should be addressed to:

       Draft Report – Operational Ring Fencing Guideline
       SA Independent Industry Regulator
       GPO Box 2605
       Adelaide SA 5001
       Facsimile: (08) 8463 4449

       Email: saiir@saiir.sa.gov.au

Submissions should reach the Office of the SAIIR on or before 16 August 2002.

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                                                         Operational Ring Fencing Requirements for the
                                                                          SA Electricity Supply Industry


The design and construction of distribution network extensions are contestable activities in
SA. There are a number of entities that compete in this market; ETSA Utilities (through its
ETSA Field Services business unit) and various other external contractors. Where a new
connection requires a network extension to be constructed, customers are able to call
tenders for these works. If the new connection involves upgrading of the existing
distribution network, ETSA Utilities is the only party that can undertake this work. The
rules for contestability of these connection services are specified in Chapter 3 of the
Distribution Code.

Even when an external contractor wins a tender for the extension works, there are certain
services and information that must be provided by ETSA Utilities in order for the works to
be completed. This is the case even if ETSA Utilities was an unsuccessful bidder in the
tender. These include:

▲   Technical drawings;

▲   Switching works

▲   Provision of access permits

▲   Inspection of works to ensure it meets ETSA Utilities’ standards

It has also been the case that, in the past, the main source of materials for external
contractors has been ETSA Utilities.


Submissions received from the National Electricity and Communications Association,
Cowell Electric Supply Pty Ltd, South Drilling Pty Ltd and the Urban Development Institute
of Australia suggest that external contractors are finding it difficult to effectively compete
with ETSA Utilities in this market. Some of the major issues cited in the submissions, and
the SAIIR response to these issues, include:

                   Issue                                          Response

Timeliness of provision of information and It is proposed that this issue be addressed
services by ETSA Utilities to external through clauses 3.2 and 3.3 of the draft
contractors.                               Guideline.

Certain fees are applicable to the customer      Clause 3.3 of the draft guideline seeks to
if a contractor undertakes work, but are not     address a situation where ETSA Utilities
applicable if ETSA Field Services                may require a contractor to pay for certain
undertakes the work.                             services performed by the distributor but
                                                 does not require ETSA Field Services to
                                                 pay for the same service.

The need for transparency in accounting for      Addressed       primarily  through   SAIIR
transactions between ETSA Utilities’             Guideline No. 1 “Electricity Regulatory
operational    centres   (regulated    and       Information Requirements – Distribution”.
contestable centres).                            The draft Guideline also seeks to ensure
                                                 that operations staff involved in both the
                                                 regulated distribution business and ETSA
                                                 Utilities’ contestable business are shared
                                                 on an arms length commercial basis. It also
                                                 requires that the provision of goods or
                                                 services provided to a related business by
                                                 the regulated business be done on an arms
                                                 length commercial basis.

External contractors must complete projects      SAIIR has no concerns about the current
to ETSA Utilities’ specifications. Contractors   manner in which E Drawings are provided
have concerns about equality of access of        to contractors. However, clause 3.2 should
ETSA Utilities’ “E” Drawings design and          ensure that certain information is generally
technical standards.                             provided to contractors on a non-
                                                 discriminatory basis.

ETSA Utilities currently sets the standards      The SAIIR has proposed that these matters
for external contractor’s work and is the        be kept within the controls of ETSA Utilities,
provider of       certain materials. The         but is seeking to ensure that the provision
responsibility for setting design standards      of certain goods, services and information
and materials procurement should be ring         is on non-discriminatory, commercial terms.
fenced so they are out of ETSA Utilities’
control. “Standards” should be with

                                                                                                Draft Report
                                                              Operational Ring Fencing Requirements for the
                                                                               SA Electricity Supply Industry

independent body (eg SAIIR)              and
"materials" with a new company.

It is alleged that there is discriminatory           It is considered that inspection of
treatment by ETSA Utilities in performing            contractors work falls within the scope of
inspections of projects. It is suggested that        the regulated distribution business and it is
an independent inspector is needed.                  therefore proposed that this service remain
                                                     with that business. However, there is a
                                                     requirement under clause 3.3 of the draft
                                                     Guideline to provide this service on a non-
                                                     discriminatory basis.

Concerns about the availability and cost of Clause 3.3 of the draft Guideline addresses
access permits and switching services.      this concern.

Code of Practice for Accreditation and               It is not proposed to remove the
Contestable Works should be established              accreditation function from ETSA Utilities. It
and administered by independent body (eg.            is   proposed     that    accreditation   be
as in NSW).                                          undertaken on a non-discriminatory basis,
                                                     pursuant to clause 3.3 of the draft


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Description: Operational Ring Fencing for the SA Electricity Supply Industry ...