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December 2, 2016

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What do you do with a half-baked cake?

November 11, 2016

I was asked this very question recently in relation to the deferral of the State Government’s energy reform package. It is a good analogy – it isn’t like you can get all those ingredients back to their former state, and it certainly isn’t edible!

 

So what are you left with? And what do you do with it?

 

In March 2014, the Minister for Energy, Mike Nahan announced that the Government would conduct a 'root and branch review' of Western Australia’s electricity industry. This part of the review culminated in an options paper which recommended, among other things:

  • The restructure of Synergy into three competing organisations, which may combine generation and retail functions.

  • Full or partial privatisation of one or more of those new organisations.

  • Removal of electricity subsidies.

  • Introduction of advanced metering.

  • Introduction of electricity retail contestability.

  • Introduction of metering contestability.

  • Moving from our current capacity plus energy market to an energy-only market based on the national market arrangements.

  • Moving from the state-based electricity network and retail regulatory frameworks to the national framework.

These recommendations did not necessarily translate into the reform package we see today. A year later, there were no plans to restructure or privatise Synergy, no discussion related to electricity subsidies, no talk of a large scale advanced meter roll-out or tariff reform and no announcement of metering competition.

 

As disappointing as this is, there has been some progress. To-date the Minister has announced four initiatives that aim to reduce overall costs and improve our market arrangements:

  1. The replacement of the State-based market and system operators with the national, Australian Energy Market Operator (AEMO).

  2. The adoption of some chapters of the national electricity rules to implement various aspects of the national arrangements, including network regulation and system operations by 1 July 2018.

  3. The adoption of national electricity retail arrangements and introduction of full retail contestability by 2019/20.

  4. The move from the State-based electricity and gas regulator to the national, Australian Energy Regulator (AER).

In June 2016, a package of legislative reforms was introduced into Parliament to provide the foundation for the four initiatives. Today, almost six months later, the Government has announced that these Bills cannot be enacted by the end of the year as planned.

 

Furthermore, by the time that Parliament returns in 2017, the Government will be unable to make any decisions, including enacting the Bills, as it will be in the caretaker period, immediately prior to the State election.

 

This means that three years after the review began, in March 2017 we will have seen no outcomes of the State Government’s reforms and also seen no business as usual evolution of the industry which has been stifled with the weight of the broader review.

 

So what of this deferral? It is only four months, right?

 

It will be at least four months before we know any more, but in the mean-time the deferral has quite wide-spread ramifications.

 

The State Government's Public Utilities Office was progressing with the development of the detail behind the policy decisions that were enshrined in and underpinned by the Bills. It will now need to urgently triage various aspects of the industry where the impact of those assumptions no longer holding true is immediate and significant.

 

Western Power was preparing to submit its access arrangement, which sets revenues for the next five years in April 2017 under the assumption that the national network regulation framework would apply and the AER would be making a determination. But this underlying assumption is now wrong. Western Power will now need to make its submission under the State-based regulatory framework, which is quite different, and to the ERA, in accordance different rules.

 

Both regulators were preparing for the transition of Western Power's regulation and upcoming access arrangement to the national framework.

 

AEMO submitted its revenue proposal to the ERA for approval by December 2016 which assumed it was developing market and system operations solutions that reflect those used in the national electricity market for commencement in July 2018. But this underlying assumption is now wrong. AEMO cannot implement national systems until the Government has enacted legislation to allow it to do so, presumably meaning that the implementation program is on hold until further notice, and therefore the new market arrangements are unlikely to be ready in time for the July 2018 commencement.

 

Market participants were engaging with AEMO and Public Utilities Office to operationalise the new market arrangements and developing their own new systems and processes to be able to interact in the new market. Again presumably these activities are on hold until businesses can convince themselves that the investment is worthwhile and not at risk.

 

So what are we left with? And what do we do with it?

 

At this stage both are unclear.

 

You can form your own views about the chance of a change in Government in March, and if there is a change in Government what the Labor party will do with the reform program. But irrespective of your view, you have to acknowledge that there is a real risk that more than three years’ worth of work may return nothing to the industry. And that is disappointing!

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