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Business authorisation, ring-fencing and retailer failure

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					        Business authorisation, ring-fencing and retailer
                     failure arrangements
        Response to Retail Policy Working Group Paper 3
                                      7 March 2007



1. Overview

Key points
•   The ENA welcomes the release of the Retail Policy Working Group Working Paper
    3 on business authorisation, ring-fencing and retailer failure arrangements.
•   Energy network businesses support the development of a simple, national
    framework for distribution and retail business authorisations, provided that:
    -     Licences do not bestow or impose substantive rights or obligations, and are not
          used for enforcement
    -     There are not dual national and state-based licensing regimes
    -     The appropriate party is licensed
    -     Retailers demonstrate they can satisfy prudential requirements of use of
          system agreements as a market entry requirement
•   The ENA notes that issues with respect to ring-fencing are currently being
    considered as part of the 1 July 2007 legislative package for economic and access
    regulation. The ENA therefore does not consider that these issues should be
    revisited as part of this national distribution and retail framework.
•   The ENA supports the Working Paper recommendation that retailer of last resort
    arrangements be determined by the AEMC through its Rule change and market
    development functions, rather than through the current consultation process. This
    is because the complex broader industry issues raised by retailer failure can be
    better considered through the established national consultation processes
    established by the AEMC, and resolved with reference to the market objective.




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2. Background
This submission responds to the Retail Policy Working Group Working Paper 3 released
on 25 January 2007 (the Working Paper).
The Energy Networks Association is the national representative body for gas and
electricity distribution network businesses. Energy network businesses deliver electricity
and gas to over 12 million homes and businesses across Australia through approximately
800 000 kilometres of electricity lines and 75 000 kilometres of gas distribution pipelines.
These distribution networks are valued at more than $35 billion, and each year energy
network businesses undertake capital investment of more than $5 billion in network
reinforcement, expansions and greenfield extensions.
This submission follows the structure of the Working Paper.

3. Business Authorisations
The ENA supports the development of a simple, national framework for distribution and
retail business authorisations. Business authorisations can assist in identifying relevant
market players, both for negotiations between parties and to identify those to whom
relevant rights and obligations apply.
The ENA supports the recommended option 5 in the Working Paper as it provides for a
minimum market entry test for retailers, while recognising that the case for a market
entry test for distribution businesses is limited.
Past ENA submissions to the MCE Standing Committee of Officials on this issue in
October 2004 and January 2005 have expressed support for a high level national licence
or authorisation, subject to a number of outstanding issues and questions being resolved.
The ENA’s key issues in supporting a national distribution business authorisation
framework are that:
•   The authorisation is not used as an enforcement mechanism in addition to civil
    penalty regimes established through the National Electricity Law and National Gas Law
    The ENA supports a high level licence or business authorisation that has as its
    principle purpose ease of identification of relevant market players, and high level
    market entry requirements such as those required for registration as a network
    service provider under the National Electricity Law.
    The ENA supports the position in the Working Paper that substantive rights and
    obligations be established through the relevant Law and Rules, and not through the
    licence. It is critically important that the licence not be used as an enforcement
    mechanism, as this would risk double jeopardy where civil penalties for non-
    compliance are also in place. In this regard, clear guidance on the grounds for the
    potential revocation of a licence must be established in legislation to guide the
    regulator.
•   There is not a dual licensing regime at national and state levels
    The Working Paper appears to propose a dual licensing regime to apply to distribution
    businesses with a national licence for economic regulation, and the potential for
    jurisdictional licences for technical and safety matters. The ENA does not support an


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    outcome that leads to a dual licensing regime applying to distribution businesses.
    This appears to be a potential outcome under both options 4 and 5 in the Working
    Paper.
    As outlined earlier, the ENA supports a national licensing regime on the basis that
    the role of the licence is limited to identifying key market players, and setting some
    high level market entry requirements. The ENA supports the principle set out in the
    Working Paper that licences should not bestow or impose substantive rights or
    obligations. The ENA considers that this principle should apply at both the national
    and jurisdictional levels. No licence, regardless of whether it is granted by a state
    agency or regulator, or by a national agency or regulator, should bestow or impose
    substantive rights and obligations.
    Given this limited role for licences, creating a dual licensing regime appears
    redundant. Only one instrument is required to identify relevant market participants,
    to which both jurisdictional and national legislation could refer.
    It may be appropriate for the AER and jurisdictional safety and technical regulators
    to work together to ensure that any market entry provisions are satisfied through the
    allocation of a single licence.
    The ENA also notes that licensing requirements have in the past been accompanied
    by significant licence fees. The ENA considers that under the new governance
    arrangements with Commonwealth government funding of the AER, licence fees
    should not continue at the national or jurisdictional level.
•   The appropriate party is licensed
    It is important that any licensing regime recognises that, currently for some
    distribution businesses, the licence holder contracts functions to an asset
    management company. Where these contractual arrangements apply, it is important
    that only one party is a licence holder for the relevant network and that the
    legislation and Rules are clear that the licence holder is the responsible party for
    regulatory compliance. The ENA considers that the asset owner should be the licence
    holder, rather than the asset operator, as the asset operator can change from time to
    time through contractual changes.
•   Granting of retail licences considers the ability of retail businesses to satisfy
    prudential or credit support requirements set out in legislation and Rules supporting
    the ENA proposed approach to use of system contracting
    The ENA response to Working Paper 2, on use of system arrangements between
    distributors and retailers, outlined the importance of adequate credit support
    arrangements for distributors where they are legally obliged to contract with retailers
    for the use of the distribution system. The ENA considers that the proposed
    obligation on retailers to provide adequate credit support though the use of system
    contract should be supported by a parallel requirement that retailers demonstrate at
    the time of applying for a retail licence that they will be able to adequately meet the
    use of system prudential requirements and obligations. Relying on the prudential
    requirements of market customers administered by NEMMCO would be insufficient
    to address this issue.
•   AER ability to issue guidelines on how they will exercise their discretion in granting
    licences

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   The ENA supports the proposal in the Working Paper that the AER would be able to
   issue guidelines outlining how it intends to exercise its discretion in granting licences
   to retail and distribution businesses. This guideline making power should be limited
   to procedural issues and not allow the AER to impose substantive obligations on
   parties, as such an approach would undermine the market governance arrangements
   that separate rule making from regulation.

4. Ring-fencing
The ENA supports effective ring-fencing arrangements between regulated networks and
competitive services provided by a related business.
Considerable detail on the proposed approaches for ring fencing in the gas and electricity
sectors has been proposed as part of parallel consultation on the exposure drafts of the
National Gas Law (NGL) and amendments to the National Electricity Law (NEL) for the 1
July 2007 legislative package. The ENA has engaged fully in this process and considers
that it is the appropriate forum within which to establish the new national ring-fencing
arrangements. This is because ring-fencing arrangements are a part of third party access
regulation by ensuring competition and non-discriminatory access to network services
for non-related competitive businesses.
The ENA notes that the Working Paper sets out a range of possible options for ring-
fencing, however, the decision between these options will ultimately be decisions within
the scope of the NGL and NEL development and implementation work stream.
The ENA approach supports the inclusion in legislation of relevant high level rights and
obligations on the AER and regulated businesses, with detailed rules and approaches set
out in the Rules. The ENA does not support the use of regulator-generated guidelines to
impose substantive obligations on businesses, as such an approach would undermine the
market governance arrangements that separate rule making from regulation. The ENA
therefore specifically rejects option 3 set out in the Working Paper.
The ENA also notes that it is important that ring fencing arrangements are consistent
between parties with parallel obligations. It is therefore important that ring fencing
obligations imposed on electricity transmission businesses are consistent with those
applying to electricity distribution businesses.

5. Retailer failure arrangements
Appropriate retailer failure arrangements are an important part of the competitive
energy market. As the Working Paper points out, current arrangements are of varying
complexity, and display considerable diversity across jurisdictions and across the
electricity and gas sectors.
Determining an appropriate long term national arrangement for responding to retailer
failure appears to be beyond the scope and expertise of the current process and
stakeholder reference group. Complex liability and market arrangements must be in
place to satisfy all financially liable parties, and this may require changes to current
NEMMCO approaches and procedures, and in some cases new rules and procedures.
The ENA supports the recommendation in the Working Paper (option 2) that this body of
work, including the extensive consultation processes, be carried out by the AEMC,


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following a direct referral through legislation or from the MCE to develop and progress
the establishment of a national retailer failure regime.
The complexity of this issue, as well as the potential industry-wide ramifications of a
retailer of last resort event, means that a comprehensive and consultative process must
be undertaken to determine an appropriate national approach. The ENA considers that
the AEMC is best placed to undertake this work as:
•   The AEMC is the legally designated rule-maker and market developer for the
    electricity sector, and will soon also undertake this role for the gas sector
•   Retailer failure arrangements have industry-wide ramifications, and finding an
    appropriate outcome will require engagement from all industry participants
•   The AEMC has a legislatively established framework within which to conduct an
    industry-wide consultation process
•   The AEMC must ensure that arrangements satisfy the market objective.
The ENA considers that it is inappropriate to include details of the regulatory scheme for
the ROLR in legislation, as arrangements are likely to be complex and may require
further development as experience in the regime develops. It is therefore more
appropriate for high level principles for the ROLR to be included in legislation, with
detailed provisions set out in the Rules. These principles should not presuppose a
particular outcome from the Rule change process, but instead set out high level issues to
be considered by the AEMC.
It is also important that existing ROLR schemes continue to apply in the transitional
period between the establishment of the legislation for the distribution and retail
framework, and the completion of the AEMC review and Rule change process. The AER
should administer the current state-based regimes until they are replaced by national
arrangements.




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