Regulator inprofile

Dr BrianMartinDr Brian Martin has aDoctor of Philosophy in Economics from theUniversity of WesternAustralia. He has heldpositions in a number

of Australian Commonwealth andWestern Australian Governmentagencies over the past 20 years. Some of these agencies include theWater Authority of Western Australia, Ministry of Premier and Cabinet,Department of Industrial Develop-ment and Commonwealth IndustriesCommission. A large amount of thistime working as an economist inpolicy matters - mainly dealing withindustry assistance and industryregulation.

On two occasions Brian has workedas a consultant to the Royal ThaiGovernment, Thailand, assisting with the restructuring of its agriculturalresearch and farm developmentagencies.

Brian was appointed Coordinator ofWater Services, in Western Australia,to establish and lead the newlyformed Office of Water Regulation. This position was established underthe Water Services Coordination Act1995. For the past year Brian hasalso represented Western Australiaon the National Task Force on Water Industry Reform.

Office of WaterRegulation

Developing WesternAustralia’s WaterIndustryIn 1995 Western Australia’s waterindustry was restructured establishing three separate entities that regulate,control, conserve and supply theState’s water needs.

The restructure saw the division ofthe Water Authority of WesternAustralia into two new entities – theWater Corporation and the Watersand Rivers Commission.

At the same time the Office of WaterRegulation was formed as the waterindustry regulatory body. The Officereports to the Minister for WaterResources.

Under the Water ServicesCoordination Act 1995, the Office ofWater Regulation has authority to :

• Regulate and license the provision of water services;

• Coordinate and advise on waterservices policy; and

• Perform functions under lawsrelating to the provision of waterservices.

The core purpose of the Office is :

• As an agent of government tofacilitate a fair deal for waterservice customers/consumers andproviders by promoting andfacilitating a competitive andefficient water industry.

The core values of the Office are to :

• Be independent in advice anddecisions, based on consultation,analysis and judgment;

• Influence others by workingcooperatively with them;

• Recognise the inter-relationshipbetween water services andsustainable development, thequality of life and theenvironment;

• Build and maintain credibility;

• Create a satisfying workenvironment based on teamwork,mutual respect and professionaldevelopment;

The Office executes its core purposeby :

• Administrating and furtherdeveloping its licensingmechanism;

• Providing advice to the Ministerregarding price levels andstructures;

ContentsRegulator in profile 1Office of Water Regulation 1Telecommunications 3Australian Gas Industry 6National Electricity Industry 8State developments 10

Victoria 10South Australia 13Western Australia 13New South Wales 15Tasmania 16ACT 18

Newsbriefs 19Contacts 20

Issue 1, April 1999A publication of the Utility Regulators Forum

• Being the Minister’s prime sourceof independent advice on thefuture development of theindustry; and

• Encouraging competition andintroducing water efficiencies.

Under the Water ServicesCoordination Act, 1995, the Office of Water Regulation performs a number of vital functions including :

• Developing and administratingthe licensing framework;

• Assisting the Minister plan andcoordinate for the provision ofwater services in the State;

• Advising the minister on allaspects of policy relating to waterservices, including:

• The water services needs of thestate;

• The introduction andencouragement of competition;

• The promotion of efficiency in thewater services industries;

• Ways of promoting and achieving open access to water servicesystems;

• Ways of achieving greaterefficiency in the use of water;

• The use of water services policy to assist in achieving other policyobjectives of government;

• Matters relating to the operation of relevant legislation;

• Charges levied for the provisionof water services.

• Monitoring the performance ofwater services industries and those participating in them, and ofproviders of water services;

• Consulting with interested groupsand persons;

• Undertaking, sponsoring andcoordinating research,development and demonstrationrelating to water services.

• Promoting the development ofcommercial applications inrelation to :

• Water of all descriptions including storm water and waste water;

• By-products from the treatment ofwaste water.

• Producing and publishinginformation and reports onmatters relating to water services.

The Interests of WaterIndustry Customers

The Office of Water Regulationattends to the interests of the waterindustry’s customers. Specifically this involves :

• Promoting efficiency andcompetition in the water industryso as to hold down costs;

• The licensing of water suppliers so as to set and uphold quality;

• The development of policy onwater use, pricing anddistribution; and

• The fostering of customer charters and feedback development byproviders.

Promoting efficiency

As one of the major responsibilitiesof the Office of Water Regulation topromote competition in the waterindustry, a range of approaches toimproving the efficiency of the waterindustry are being considered by theOffice. These include :

• Encouraging new suppliers toenter the industry;

• Assisting in the planning of newwater services;

• Advising on pricing, policy andfuture policy;

• Research and development aimed at improving water industryefficiency;

• Promoting alternative sources ofwater;

• Fostering community involvementin the industry

• Promoting efficient water use byconsumers; and

• Farm Water Planning.

Licensing Service Providers

The licensing structure ensures thatwater service providers have clearguidelines and standards underwhich to operate.

Under the new legislation, 161Controlled Areas in the State havebeen defined. These are areas inwhich an Operating Licence isrequired to provide water service. All bodies supplying water services in acontrolled area are required to holda licence.

There are four classifications forControlled Areas. These are :

• Water supply;

• Sewerage;

• Irrigation; and

• Drainage.

The licensing process provides allpotential suppliers with theopportunity to obtain licences, butmore importantly ensures that licence holders have the ability to supplywater services to the standardsspecified in the licence. Parties whowish to compete in the provision ofexisting or new water services may, at any time, apply for an OperatingLicence.

Licences require that suppliersaddress a range of issues including :

• Asset management;

• Operational audits;

• Technical standards;

• Prescribed individual standards of performance;

• Standards for the provision ofwater services; and

• Performance indicators andreporting requirements.

Copies of all licences issued areavailable for public inspection at theOffice of Water Regulation.

The Minister has the authority toimplement a range of sanctions if aservice provider fails to deliver aservice consistent with OperatingLicence requirements.

2

Telecommunications

ACCC draft decision toaccess to Telstra’s localnetwork

On 14 December 1998 theCommission announced its draftdecision to require Telstra to allow its competitors direct access to the useof its customer access network, thatis, the copper lines which linkcustomers to local telephoneexchanges. This would allowcompetitors to provide both localcalls and high-speed data and otherenhanced services to customers using Telstra’s infrastructure for the firsttime. The Commission’s draftdecision is part of its public inquiryinto competition for localtelecommunications services, whichbegan in March 1998. (See Issue 6of the Utility Regulators Forum forfurther background to this inquiry.)

At present, competitors are restrictedin where they can connect intoTelstra’s network, whichunnecessarily increases their costs ofproviding services. If the draftdecision is confirmed, competitorswould be able to connect intoTelstra’s local network, reducing their reliance on Telstra’s infrastructureand thereby minimising their accesscosts. The decision would alsosecure the rights of service providersto resupply local calls, that is to sellto retail customers calls they buy inbulk from Telstra.

The Commission expects its decisionto lead to lower prices for all calls,including local and longdistance/international calls. Itbelieves the decision would alsostimulate the introduction ofhigh-speed data services, fastInternet access and other interactiveservices; reduce the costs ofparticipating in the informationeconomy; and increase the use ofe-commerce.

The Australian CommunicationsIndustry Forum (ACIF) has formed aworking party to help implement theCommission’s decisions and to dealwith a number of technical andoperational issues associated withthe supply of these services.

The Commission also issued a briefexplanatory statement, whichprovides a summary of the key issues and includes descriptions of theservices that the Commissionproposes to declare. Full details arecontained in the Commission’s draftreport issued on 23 December 1998. The explanatory statement and thedraft report are available on theCommission’s website.

The Commission sought feedback on the draft report from thetelecommunication industry,end-users and the public by 15February 1999. After considerationof comments on the draft report, theCommission will move to finalise itsdecision on whether to declare theservices and then publish its report.

Long distance mobilecall inquiryOn 14 December 1998 theCommission issued a discussionpaper on its 'Public inquiry intocompetition for long distance mobiletelecommunications services'. TheCommission convened the inquiry toexamine whether it should interveneto declare a service that wouldenable a wider range of serviceproviders to supply the long distancecomponent of mobile calls. Declaration allows access to theservices that service providers need in order to supply competitive servicesto end-users.

The decision to hold the inquiryfollowed earlier consideration ofthese matters at the industry levelthrough the TelecommunicationAccess Forum (TAF). Members of the TAF were unable to reach consensusas to whether these services shouldbe declared and accordingly the

matter was referred to theCommission. Some industry playersargued that declaration of theproposed services would lead tolower prices for long distanceservices. Others argued that there isalready healthy competition in themobile market. This inquiry providesthe opportunity to test the variousarguments and to hear from thepublic.

Submissions in response to theCommissions discussion paper weredue mid February 1999. TheCommission is currently consideringthe matter. The paper is availablefrom the Commission offices and onthe Commission’s website.

Interconnect prices/undertakingsBriefing for the Commission onTelstra’s Undertakings

On 7 November 1997 Telstrasubmitted to the ACCC threeUndertakings, specifying the termsand conditions by which it proposedto supply originating and terminating access (interconnection) to its PublicSwitched Telephone Network (PSTN), digital (GSM) mobile network andanalog (AMPS) mobile network.

Under the provisions of the TradePractices Act the ACCC is required to accept or reject the Undertakings. On 8 January 1999 the ACCC made a draft decision to reject Telstra’sPSTN Undertaking. On 17 February1999 the ACCC made draftdecisions to reject Telstra’s GSM and AMPS Undertakings. Draft reportsdetailing the reasons for thesedecisions have been released, andthe ACCC has called for submissions from interested parties before arriving at final decisions to accept or rejectthe Undertakings.

In arriving at its draft decisions toreject the Undertakings, the ACCCcommissioned two majorconsultancies, and undertook anumber of studies internally in order

3

to make an assessment of whetherthe terms and conditions in theUndertakings were reasonable. These included:

• Construction of a model byNational Economic ResearchAssociates (NERA) to estimate thecosts an efficient firm would incurin providing PSTN interconnection using modern technology andequipment.

• Estimation of the current costs ofproviding PSTN interconnectionbased on the costs Telstraincurred in the past.

• Comparison by Ovum Ltd ofcharges in the PSTN Undertakingwith the charges for the same orsimilar services in other countries.

• A detailed assessment of theimplications the non-price termsand conditions in the Under-takings (such as conditionsgoverning access tointerconnection) would have onTelstra, its competitors andcompetition.

The NERA study suggested that theefficient costs of providing PSTNinterconnection are less than half thecharges in the Undertaking. This was confirmed by the ACCC’s estimationof the current costs of providingPSTN interconnection based on thecosts incurred by Telstra in the past.

The draft decisions of the ACCC didnot rely on the assessment of theprice terms and conditions becausemost of these expired on 30 June1998 (and many were not specifiedin the GSM Undertaking). Nevertheless, the ACCC assessedthese prices for the PSTNUndertaking on the basis that it mayassist in the development of futureundertakings.

The draft determinations wereultimately made on the basis that thenon-price terms and conditions in the three Undertakings (which areidentical in each) were notreasonable. It was determined thatthe non-price terms and conditions

would provide Telstra with asignificant amount of discretionabout how, to whom and wheninterconnection would be provided to its competitors. This would createconsiderable uncertainty and gaveTelstra advantage over itscompetitors.

Facilities Access CodeThe Commission is developing aFacilities Access Code (FAC) settingout the terms and conditions whichare to be complied with in relation to the provision of access to eligibletelecommunication facilities underPart 5 of Schedule 1 of theTelecommunications Act 1997.

An extensive public consultationprocess has been undertakeninvolving industry and otherinterested parties. The Commissionexpects to finalise the Code beforethe middle of 1999. Followingfinalisation, the Code will need to be tabled in Parliament as adisallowable instrument.

At present the Code is being revisedfollowing legal advice, which will see some major re-structuring on theCode. The amendments recognisethe absolute right to access subject to appropriate pricing (compensation).

The revised Code together withexplanatory material (which will nowincorporate the bulk of the previousdraft Code) was released forcomment in early February 1999,with comments due by March 1999. Following this process, theCommission would make a finaldecision on the Code. As adisallowable instrument, the Codemust then be tabled in Parliament for 15 sitting days and takes automaticeffect after this period if there are noobjections.

The Code applies totelecommunications towers, sites oftowers and certain undergroundfacilities (such as ducts). The Code is intended to facilitate co-location of

facilities which should promotecompetition by facilitating new entry. The Code gives both access seekersand providers more certainty, andhopes to provide for a timely process for the provision of access. Thisshould reduce environmentalconcerns about multiple facilitiesbeing constructed within a particulararea and promote competition byreducing the cost of new entry forboth new mobile wireless and fixedline operators.

Mobile roaminginquiriesThe Commission has beenmonitoring the development ofcompetition in mobile services andhas conducted an inquiry into mobile roaming services. It has announcedan inquiry into mobile to fixedservices.

In March 1998, the Commissioncompleted its inquiry into domesticinter-carrier roaming. Roaming letscustomers of one mobile network use their handsets to make and receivecalls in areas where their providerhas no network coverage by usinganother network’s coverage. Roaming can be important to newentrants who rolling out networks insome areas but not in others andwho require an ubiquitous nationalservice. The Commission decidedthat competition between existingmobile carriers for the provision ofroaming services to new entrantsshould be given an opportunity towork rather than prescribe roamingthrough declaration of that service. The Commission stated that if theexisting carriers refuse to supportservices on a commercial basis, theCommission may review itsnon-declaration decision.

4

Customer TransferProcess (CommercialChurn)/CompetitionNoticeIn August 1997, Telstra introduced arevised customer transfer process(known within the industry as‘commercial churn’). In essence,‘commercial churn’ is the transfer ofan end-user from one carriageservice provider to another. Serviceproviders use this service to engagein local call resale.

Subsequently, between October andDecember 1997 the Commissionreceived complaints from industryconcerning the terms and conditionsof the service and the way in whichthe service had been introduced.

• Complaints alleged that Telstrahad unilaterally imposed theservice, had not consulted andrefused to negotiate on thetransfer conditions. They wereconcerned about the transferconditions relating to:

• transfer fees and inheritance of pre-transfer debt;

• the use of a complex standardtransfer authority form;

• the rejection of transfers andtransfer rejection fees; and

• the time taken by Telstra toprocess transfer requests.

Of particular concern was the factthat unless service providers paidTelstra a fee of $30 per service, theyinherited pre-transfer debt. Thiscombined with other transferconditions made local call resaleunprofitable. This also impactedupon fixed local telephonycompetition and long distancetelephony competition services due to the importance of ‘one bill’.

The Commission undertook anextensive investigation, and helddiscussions with industry participantsregarding this matter. TheCommission was encouraged to seeself-regulatory initiatives developing

solutions to particular customertransfer difficulties. One suchinitiative is a working groupestablished under the auspices of the Australian Communications IndustryForum, which has developedindustry-wide solutions to some ofthese problems.

During the course of theinvestigation, Telstra expressedconcern about the Commission’sinvolvement in this matter beingunwarranted and not in accordancewith the Commission’s attitude tolight-handed regulation. While theoutcomes being developed throughself-regulatory process were a movein the right direction, theCommission was concerned that thishad not yet translated into realchange for this group. Also, theissue of a transfer fee and debtinheritance was outside the scope ofthe self-regulatory process.

The Commission provided Telstrawith the opportunity to comment onthe allegations and, in this instanceprovided Telstra with a draftcompetition notice.

The response from Telstra did notalleviate the Commission’s concernsand consequently, the Commissionformed the view that Telstra wasengaging in anti-competitivebehaviour in contravention of thecompetition rule as set out ins.151AK of the Trade Practices Act1974.

Accordingly, the Commissiondecided to issue a competitionnotice. This was issued on 10August 1998. The Commission seesthis notice as complementing industry self-regulatory initiatives. The noticecame into force on 30 September1998, which allowed Telstrasufficient time to cease itsanti-competitive conduct.

On 21 September 1998, Telstraadvised the Commission that it would be making changes to the transferconditions, effective from 28September 1998. Consequently, the Commission withdrew the Notice

issued on 10 August 1998 andissued a fresh Notice coveringTelstra’s conduct for the period 17July 1997 to 27 September 1998.

In terms of the changes that Telstraintroduced on 28 September 1998,the Commission continued to receive complaints from industry andconsidered further action wasnecessary in order to prevent anticompetitive conduct in the local callmarket. Accordingly on2 December 1998 Commission,issued a further three CompetitionNotices regarding Telstra’s local calltransfer process.

The Commission remainedconcerned about the difficultiesconfronting other telecommunication carriers in having to use Telstra’smanual transfer process that iscumbersome, slow, inefficient andcostly.

Carriers must use this manual system or, alternatively, use an automatedprocess that requires carriers to beTelstra’s debt collector. TheCommission is of the view that thedebt recovery requirement appears to impose huge internal costs on thosecarriers collecting monies onTelstra’s behalf.

Telstra’s use of a manual transferprocess meant that the associatedcosts, and consequently the feesimposed by Telstra, are far higherthan would be expected were Telstrato have in place an efficientautomated process

On 24 December 1998 theCommission instituted proceedings in the Federal Court against Telstraalleging:

• that Telstra required other carriers wanting to transfer customersfrom Telstra to use a process thatrequires carriers to be Telstra’sdebt collector; and

5

• where carriers choose not tocollect Telstra’s debts, Telstraimposes a fee of $15 per line,irrespective of whether or not thecarrier is transferring one line or a number of lines.

These allegations were set out in twoof the competition notices issued bythe Commission that came into force on Wednesday 9 December 1998. The Commission was of the view that Telstra had not modified the conductdescribed in the competition notices.

The third notice that was issued on 2December 1998 came into force on25 January 1999.

Directions hearings were held in thismatter before Mr Justice Hill on 22February 1999 where Telstra’ssolicitors filed a Notice of Motionseeking to have part of theCommission’s Statement of Claimstruck out. The Notice of Motion islisted for hearing on 6 April 1999 inSydney. The Commission receivedTelstra’s submissions in respect of itsstrike out application on 1 March1999 and is considering, in light ofthose submissions, whether it is nowappropriate to amend its pleadingsto incorporate some of the issuesraised by Telstra. Should theCommission amend its pleadingsthen this would obviate the need forthe strike out application on 6 April1999.

The Commission is also consideringwhether it is appropriate to issue afourth notice encapsulating theconduct contained in the earlier three notices. This would enable theCommission to argue, in thealternative, its strongest case as apackage of conduct. Proceedings inrespect of the third notice will beinitiated once a determination ismade on the merits of Telstra’s strikeout application so that any newproceedings will not be the subject of a similar application.

Broadcasting AccessServicesTelevision and Radio BroadcastingServices (TARBS) has requestedaccess to Telstra Multimedia’sbroadband cable television networkpursuant to the Commission’sdeclaration of broadcasting service(including Pay TV) under theTransitional Act. Telstra and Foxtelhave objected to the provision ofaccess on grounds that:

(1) the initial servicedeclaration description was invalideither because the Commissionimpermissibly specified more thanone service or the Commissionspecified a service that 'did not exist'on 13 September 1996; and

(2) the imposition of anobligation on Telstra would depriveFoxtel of a protected contractualright.

The Commission released adiscussion paper on 22 December1998 setting out a revised servicedescriptions of the (analogue)broadcasting access service and also circulating a technology neutralversion. Comments were due byearly February and 14 submissionshave been received to date. TheCommission expects to come to aview on the revised declaration byApril 1999.

TelecommunicationsAccess Disputes(Arbitrations)AAPT Ltd has notified of a disputerelating to the price paid by AAPT Ltd for access to the public switchedtelephone network (PSTN) operatedby Telstra Corporation Limited. TheCommission has begun thearbitration process.

Primus Telecommunications Pty Ltdhas notified the ACCC of an accessdispute under Part XIC of the TPA. This dispute relates to Telstra’s supply of transmission capacity to Primusand the price to be paid by Primus to Telstra for access to the publicswitched telephone network (PSTN)operated by Telstra Corporation Ltd. The Commission has begun thearbitration process.

Contact Michael Cosgrave ACCC (03) 9290 1914

The AustralianGas Industry

Access Arrangements

Progress

Since the Commission’s finalapproval of the access arrangements for Victorian gas transmissionpipelines, AGL Pipelines (NSW) PtyLtd has applied for approval of itsaccess arrangement for the Marsdento Dubbo Pipeline (NSW). Anextension to Tamworth will becomepart of the access arrangement onceit is completed. Interested partieshave been invited to makesubmissions on any issues relevant to the access arrangement by 19 March 1999. The proposed accessarrangements for Moomba toAdelaide (Epic) and Moomba toSydney (EAPL) pipeline systems areexpected to arrive by 31 March1999. Applications in respect ofQueensland pipelines will not be due until the Queensland legislationcomes into force. That legislation isstill subject to a review process by the National Competition Council. TheCommission has been discussing thereview process with the NCC and the Queensland Government.

The operators of a number of smaller pipelines have applied for extensionsof the dates by which they must

6

submit proposed accessarrangements. Extensions weregranted as follows:

• Amadeus Basin to Darwin Pipeline (NT Gas /AGL) – 21 April 1999;

• Darwin City Gate to BerrimahPipeline (NT Gas/AGL) – 12February 2000;

• South East (SE) TransmissionPipeline, South Australia (Epic) –31 March 1999.

The NT extensions were grantedsubject to the condition that theCommission reserved its right to varythe due date of the accessarrangements in the event that a third party requests access to thepipelines. The Commission isconsulting the market beforedeciding whether to extend the SETransmission Pipeline lodgementdate by a further year.

The status of access arrangements of all Covered Pipelines under theNational Access Code can be foundin the ACCC websitewww.accc.gov.au under ‘Gas’.

Issues

From discussions with a variety ofinterested parties over the past fewyears of formulation of the NationalAccess Code, the Commission hasbeen made aware that confidentiality of information and the impact ofexisting contractual rights on accessarrangements are likely to besignificant issues in consideringproposed arrangements.

Under section 7.12 of the NationalGas Code, the Regulator hasdiscretion to release sensitiveinformation if it is of the view thatsuch disclosure ‘would not be unduly harmful to the legitimate businessinterests of the Service Provider or aUser or Prospective User’. ServiceProviders are concerned that therelease of confidential informationmay put them and their customers ata commercial disadvantageespecially if they are listed public

companies that are subject to ASXinformation disclosure requirements. On the other hand, the Commissionis concerned that public consultationmay not be effectively carried out ifpertinent information is labelled‘confidential’ and not released to the public.

The Commission will be sensitive tothe commercial needs of companiesand their obligations to the ASX. Itwould only disclose confidentialinformation pursuant to section 7.12of the Code if it:

• formed the view that theinformation was material to oneor more of the issues the Coderequired the Regulator to consider in assessing the content of anaccess arrangement; and

• was satisfied that the disclosurewas consistent with the ‘no undueharm’ condition set out in section7.12.

The Commission is also concernedthat section 2.25 of the NationalGas Code, which protects existingcontractual rights, may potentiallyhinder the introduction of effectivethird party access arrangements forsome years to come. That could bethe case if existing contracts ‘lock up’ pipeline capacity or infrastructure orentrench favourable haulage ratesfor incumbent customers. TheCommission will have regard to theimpact of current contracts onthird-party access when assessingproposed access arrangements.

One avenue that has been suggested to partially address this issue is forpipeline owners and incumbent users to facilitate secondary market trading in unused pipeline capacity toenhance the level of pipelineutilisation. The Commission wouldbe pleased to discuss with playersany perceived Trade Practicesimplications of establishingsecondary markets for unusedcapacity.

Update on the MSOROn 9 September 1998, BHPPetroleum companies (BHPP) soughta review by the AustralianCompetition Tribunal of theCommission’s Determination (madeon 19 August 1998) authorising theVictorian Market and SystemOperations Rules. Subsequently, on1 December 1998, the VictorianGovernment enacted legislation toexcept the MSOR from thecompetition provisions (Part IV) of the Trade Practices Act (the statutoryexemption).

At a directions hearing on22 December 1998, the Tribunaldirected parties to lodge submissions by 12 February 1999 on thequestion of whether, in view of thestatutory exemption, the Tribunal hasjurisdiction to hear the appeal. TheTribunal is currently considering thewritten submissions and is likely toschedule another directions hearingfor March/April 1999.

On 22 February 1999, VENCorpsubmitted to the Commission anumber of proposed amendments tothe MSOR, arguing that thesechanges were essential to allowmarket commencement. TheCommission on 3 March 1999provided VENCorp with an‘indicative opinion’ (as requiredunder Chapter 8 of the MSOR) thatthe proposed amendments were‘material’, thereby requiringVENCorp to file an application forauthorisation or variation of theexisting authorisation. However,given that the MSOR is under reviewby the Tribunal, the Commission hasno jurisdiction to entertain such anapplication. In these circumstances,the Commission advised VENCorpthat any application forrevocation/substitution or variation of the existing authorisation would need to be made directly to the Tribunal.

7

Mereenie Producers— Gasgo SalesAgreement

(Authorisation ApplicationsA90637–45)

On 6 January 1999, theCommission issued a draftdetermination proposing to grantauthorisation to an application by the Mereenie Producers in relation to the proposed Gasgo Sales Agreement(Gasgo Agreement). The GasgoAgreement comprises individual long term take-or-pay agreementsbetween each of the MereenieProducers (as sellers) and Gasgo PtyLimited. The applications alsosought approval for the producers todiscuss and agree on commonterms, including price, for the supplyof gas under the agreement.

The Gasgo Agreement is the third ina series of contracts between theMereenie Producers and Gasgo forthe supply of gas, which is ultimatelysold to the Northern Territory Powerand Water Authority for thegeneration of electricity. The first two contracts are still current. Althoughseparate to the Gasgo Agreement,and not included in the presentauthorisation, the original GasPurchase Agreement between theMereenie Producers and Gasgoprovides a pre-emptive right infavour of Gasgo. Under thisprovision, Gasgo has the first right of purchase in the event that any otherparty seeks to purchase gas from theMereenie Producers.

The Commission accepted that therewas significant public benefit inproviding for the continued andsecure supply of gas in the NorthernTerritory for the generation ofelectricity over the term of the Gasgo

Agreement. Although it took theview that the anti-competitivedetriment likely to result from theGasgo Agreement was substantial,and was increased by the existenceof the pre-emptive right in theoriginal Gas Purchase Agreement, itwas outweighed by the likely publicbenefit.

In its draft determination, theCommission proposed to grantauthorisation for the duration of theagreement, until the earlier of 1 July2009 or the completion of delivery of the contracted amount of gas. Itproposed to extend the authorisationto their respective successors andassigns, as requested by theapplicants.

A conference regarding the draftdetermination was held at the Sydney office of the Commission on25 January 1999. The Commissionwill issue its final determination onthis matter after consideration of theissues raised by the interested partiesat the conference and subsequentsubmissions.

Copies of the draft determination are available on the Commission’swebsite.

Contact: Mark Pearson ACCC02 6243 1276

NationalElectricityIndustry

Access CodeOn 9 October 1998 the ACCCissued its decision to accept theNational Electricity Market AccessCode as a single access regime fortransmission and distributionnetworks in each of the participatingjurisdictions.

Subsequent to the acceptance of theCode individual access undertakingshave been lodged with the ACCC bytransmission networks. Theseundertakings are being evaluated interms of their conformity with theaccess code and the generalrequirements of Part IIIA of the TradePractices Act.

Code amendmentsThe Commission is currentlyevaluating proposals foramendments to the NationalElectricity Code. Amendments werelodged with the ACCC on 19October 1998. These changesrelate to transitional arrangementsfor Queensland and South Australia,market fees, modification to tradingrules and prudential requirementsand other administrative provisions. A number of the proposals weregranted interim authorisation tofacilitate the commencement of thenational market on 13 December1998. Submissions have beensought from interested parties and adraft determination is currently beingprepared.

NSW VestingContractsThe ACCC issued a draftdetermination on the NSW vestingcontracts on 9 December 1998. The draft determination proposed

8

conditional approval of the vestingarrangements. The conditions werethat:

• the strike prices of the vestingcontracts be adjusted to the lower weighted average of $37 MWh(from the contract average priceof $44.50MWh);

• the binary option contained in the type two contracts not apply onSaturdays, Sundays and publicholidays;

• any cross subsidy effects causedby the difference between theimplied purchase cost in thefranchise tariff and actual spotpurchase costs be corrected byway of a levy or dividend on theretailers; and

• the term of the contracts mustcease by 31 December 2000.

A pre-decision conference was called by a number of parties and held on16 February 1999. In light of theforthcoming NSW election, theACCC adjourned the conferenceand will reconvene on 13 April1999.

New inter-connectorscriterionAs part of its development of theStatement of Regulatory Intent, theACCC has been requested toexamine the ‘net benefits tocustomers’ criterion for newinter-connectors and networkaugmentations.

To assist with this project the ACCChas engaged the services of Ernst &Young. The draft report by Ernst &Young was published on the ACCC’s web site in early December and apublic forum was held in Canberraon 7 December 1998. TheCommission subsequently received14 submissions from interestedparties, which are also availablefrom the ACCC’s web site.

Ernst & Young have taken the viewsexpressed at the public forum and

contained in the submissions intoconsideration in finalising theirreport. The final report from Ernst &Young will be published on theACCC’s web site once it has beenfinalised.

The Commission anticipates that itwill publish by the end of March theregulatory test as proposed inNEMMCO’s suggested codechanges (for details of the proposedcode changes see www.neca.com.au).

Electricity networkpricingNECA is currently undertaking areview of the electricity networkpricing arrangements for theNational Electricity Market. A draftreport is anticipated by the end ofMarch 1999.

To assist the ACCC, and the broader community, to be informed on theissues associated with electricitynetwork pricing, the ACCC and theUniversity of Melbourne organised aconference on 14 and 15 December1998. The ACCC has also engaged London Economics to undertake areview of electricity network pricing.

The conference focused on theeconomics of networks and efficientpricing signals. Papers werepresented by a range of well-knownoverseas and Australian academicsand electricity industry experts. Copies of the conference papers can be obtained by contacting MaxineHelmling on 02-6243 1246.

The review of electricity networkpricing being undertaken by LondonEconomics is also anticipated to becompleted by the end of March1999 and will be published on theACCC’s web site. The LondonEconomics review summarisesinternational and Australianapproaches to electricity networkpricing and proposes a number ofimprovements to the network pricingarrangements in the NEM. Theseproposals include a number of

suggestions that could beimplemented in the short term as well as canvassing the transition to nodalpricing in the medium term.

TransGridThe ACCC and IPART continue towork together to determine arevenue cap for TransGrid. IPART isclose to finalising its report to thePremier, which will also consider therevenue caps and price paths to beapplied to the NSW distributionbusinesses and franchise retailers.

The current revenue cap expires on30 June 1999. At that time,pursuant to the NEM Code,TransGrid comes under theregulation of the ACCC. Both theACCC and IPART have producedissues papers in relation to theirreviews and have issued a jointstatement of process explaining howeach regulator will manage itsrespective tasks.

A revised timetable was issued in thefirst week of March 1999. Thattimetable provides that bothregulators will have completed theirwork by the end of the secondquarter of 1999 with the ACCCreleasing a draft determination inrespect of TransGrid in early May1999.

Contact: Mike Rawstron ACCC02 6243 1249

9

StateDevelopments –Victoria

2001 ElectricityDistribution PriceReview

Regulatory framework for thereview

In December 1998, the Office of theRegulator General issued '2001Electricity Distribution Price Review –Finalising the Framework' to draw toa close consultation on the overallframework for the price review. Thispaper was prepared in light of thepublic consultation process thatfollowed the release in June 1998 ofConsultation Paper No 1 which setout the Office’s preliminary thinkingon the regulatory framework andprocesses for the 2001 price review.

A primary issue raised in theconsultation was the extent to whichthe regulatory framework should relyprincipally on cost-justified estimatesof the forward looking revenuebenchmarks (the ‘building block’approach) rather than relyingprimarily on revenue benchmarksdetermined with reference to other,externally determined indices.

In light of various specificinstitutional, practical and financialcircumstances applying to theVictorian electricity distributionlicensees, the Office has decided that an approach which relied solely onexternal benchmarks would beneither desirable nor practical at thisstage. Looking beyond the currentreview, the Office has taken apreliminary view that unless aformulation can be developed whichtakes account of the specific assetvaluation and operationalcircumstances of the Victoriandistribution licensees, exclusive

reliance on an ‘externalbenchmarking’ approach may beinconsistent with the legal andregulatory framework within whichthe Office operates.

The Office has issued furtherconsultation papers on two important elements of its framework for thereview:

• Efficiency measurement andbenefit sharing; and

• The form of the Price Control.

InformationrequirementsAn important priority over the nextfew months will be to define anddevelop in detail the set ofinformation the Office will require inimplementing its planned approachto the review. The starting point forthe process implied by the ‘buildingblock’ approach will be thesubmission by the distributionlicensees of comprehensive operating expenditure, capital expenditure,revenue and financing projections for the period 2001 to 2005.

A separate consultation paper oninformation requirements for the2001 review will be released toprovide the basis for discussion withthe distribution licensees and otherinterested parties in the first quarterof 1999.

Forthcoming consultation papers and workgroups

Further consultation papers on moredetailed aspects of the regulatoryframework will be released over thenext few months including the cost of capital, asset valuation anddepreciation.

Workgroups are being set up toprogress key issues on cost drivers,information requirements and service standards with key industry andstakeholder groups.

All the Office’s consultation papersare available on its websitewww.reggen.vic.gov.au

Distribution CodeReviewThe Office undertook an extensivereview of the electricity DistributionCode, culminating in a final draftbeing distributed to industry andcustomer stakeholders in lateDecember 1998. To finalise thereview the Office convened a jointindustry/customer working group and thorough consultation took placewith this working group between Julyand October 1998. A sub-groupwas convened to specifically addressthe more detailed technical issuesrelating to quality of supply. Consultation on the final draft isproceeding and the revised Code,which is to take effect from 1 April1999, was issued in late February1999.

Key matters that the Office andstakeholders sought to clarify through the review process and whichconstitute significant changes to theexisting Code are:

• obligations of distributions(against those of retailers);

• obligations of customers;

• reliability standards;

• supply quality standards;

• customers’ rights to information;and

• maintenance standards

Regulatory auditprogramFollowing extensive and detailedconsultation with the Victorianelectricity distribution businesses, theRegulator-General has decided toimplement a regulatory auditprogram with the first audits to applyto the distribution businesses’operations during the 1998 calendar year. The Office is planning for the

10

audits to be conducted duringFebruary, March and April 1999.

The audit program has remainedfocussed on key obligations –particularly the quality of regulatorydata and compliance with servicestandards – with which compliance is difficult to reliably establish throughother means.

A key component of the auditprogram for 1999 is the assetmanagement audit. The objective of the audit is to assess whether there isa significant risk that the assetmanagement policies and practicesof the distribution businesses will lead to a substantial decline in the qualityand reliability of supply in themedium term. And to compare thisto the licensee’s current performance and its performance targets, whetherdue to a single major event or alarge number of distributed failures.

The Office will review the auditprogram after the first few audits inconsultation with the businesses andthe auditors, to evaluate the extent to which the audit objectives wereachieved.

The audits will be conductedpursuant to the distribution and retail licences (currently under amendment) and the Office’s electricity GuidelineNo.9, which will be posted on theOffice’s Web site shortly.

Contact: Ian Wilson ORG(03) 9651 0224

Airports

Request for adeterminationpursuant to section192 of the AirportsAct 1996

Synopsis

On March 9 1999, the AustralianCompetition and ConsumerCommission (ACCC) released a draft determination under section 192 ofthe Airports Act 1996 and asupporting statement of reasons. The draft determination was inresponse to a request by Delta CarRentals for a determination inrelation to certain services atMelbourne Airport. It was the firstsuch request made under the Airports Act.

The draft determination was that'landside roads and associatedvehicle facilities for dropping off andpicking up passengers at MelbourneAirport' are 'airport services' undersection 192 of the Airports Act. Thismeans that airport users would havethe right to negotiate terms andconditions of access with the airportoperator, and if the negotiationsprove unsuccessful, the opportunityto have the ACCC arbitrate thedispute

Section 192

The primary policy intent of s.192 ofthe Airports Act is to facilitate accessto airport services on reasonableterms and conditions. Section 192of the Airports Act is a specificapplication of Part IIIA of the TPA.

Section 192(5) of the Airports Actdefines an airport service byreference to services provided at core regulated airports that are both:

• necessary for the purposes ofoperating and/or maintaining civil aviation services at the airport;

• provided by means of significantfacilities at the airport, beingfacilities that cannot beeconomically duplicated; and

• and includes the use of thosefacilities for those purposes.

As to the general effect of s.192 (5),the Minister under s.192 (2) of theAirports Act automatically declaresservices that meet both criteria, 12months after commencement of theprivatised lease unless theCommission has accepted an accessundertaking. Where the Commission has accepted an access undertaking, services that are subject to thatundertaking are not declared.

Section 21 of the Aviation Legislation Amendment Act (No.1) 1988inserted new sections into theAirports Act that give the Commission the power to make a writtendetermination that a service is, or isnot, taken to be an airport service. The new ss.192 (4A) and (4B) state:

(4A) The Commission maymake a written determinationproviding that a specified service, ora specified use of a specified facility,at an airport is taken to be an airport service for the purposes of thissection.

(4B) The Commission maymake a written determinationproviding that a specified service, orthe specified use of a specifiedfacility, at an airport is taken not tobe an airport service for the purposes of this section.

The Commission considers that adetermination under ss.192 (4A) or(4B) will almost always involve anassessment of the test in s.192 (5).

Further information on theCommission’s role and thelegislation under which adetermination must be made can befound in the Commission’s DraftGuide to s.192 of the Airports Act.

11

Service definition

The starting point for the assessmentof Delta’s request for a determination was the service definition, as anassessment against the s.192 (5)criteria could not meaningfully beundertaken until the service wasclearly specified.

In forming a view on the servicedefinition the Commission wasguided by the legal framework, thenature of the dispute in question andthe approach used by the NationalCompetition Council (NCC) in itsdeclaration recommendations.

A number of submissions to itsdiscussion paper argued that theCommission should apply the service definition used by Delta in its requestfor a determination. TheCommission did take the applicant’sapproach into account. However,the Commission considered that itwas not bound under s.192 of theAirports Act to use that definition. Indeed given the legislativeframework it was not clear that itwould have been appropriate to doso.

Delta’s service definition was but one of the options. Alternatively theCommission could determine that aparticular range, or class of services,which could potentially be the subject of access requests, is taken to be anairport service. The Commissioncould also have formed the view that a different service to that referred toin the request should be determinedin order to clarify the class of services that are declared.

The draft determination contains adetailed analysis of views on how the service should be defined. Uponconsideration of those views, theCommission arrived at the followingpreferred service definition:

The provision of landside roads andassociated vehicle facilities fordropping off and picking uppassengers at Melbourne Airport.

Assessment against the section 192 (5) declaration criteria

Having arrived at a preferred servicedefinition the draft determinationassesses the service against thes.192 (5) criteria. The Commissionconcluded that the service satisfiesboth criteria and accordingly theservice should be declared unders.192. The reasons presented in thedraft determination are as follows.

Criterion (a) – “necessary for thepurposes of operating and/ormaintaining civil aviation services at theairport”

A central part of the Commission’sassessment of the service against this criterion was the application of a ‘but for’ analysis. This test goes directlyto whether Melbourne Airport couldcontinue to operate and maintaincivil aviation services in the absenceof the service that is the subject of the request for determination. Thequestion was asked: but for “theprovision of landside roads andassociated vehicle facilities fordropping off and picking uppassengers at Melbourne Airport”could civil aviation services continueat Melbourne Airport?

The draft determination concludedthat it is difficult to conceive of howMelbourne Airport could continue toprovide civil aviation services inabsence of the service. Thealternative would involve somethingakin to dropping off passengers atthe boundary of the airport andhaving them get themselvesindependently to the terminals. Onthat basis the test in criterion (a) wassatisfied.

Criterion (b) – “provided by means ofsignificant facilities at the airport, beingfacilities that cannot be economicallyduplicated”

Both Part IIIA of the TP Act and s.192 of the Airports Act contain an“uneconomic to duplicate” test. PartIIIA requires that the NCC considerwhether it would be “economical for

anyone to develop another facility”.Section 192 (5) of the Airports Actstates that the service in questionshould be provided by “means ofsignificant facilities, being facilitiesthat are uneconomic to duplicate”.

Although the wording of the two Actsdiffer, the Commission considers that their effect is the same. It discussedthis similarity in detail in its draftguide to section 192 of the AirportsAct.1 On this basis, the Commission considered that a useful startingpoint for its assessment of Delta’srequest for a determination was theapproach used by the NCC in its Part IIIA declaration recommendations.

In those recommendations, the NCChas focused on the concept ofnatural monopolies. It has suggested ‘pervasive economies of scale’ as akey indicator of natural monopolies. The Commission’s draft guide tos.192 of the Airports Act also argued that entry and exit costs are arelevant factor in considering theconcept of natural monopolies. Thedraft guide concluded that airportsare characterised by significanteconomies of scale and, at least inthe case of larger airports, significant barriers to entry and exit. On thisbasis the draft guide concluded thatit would be uneconomic for anyoneto develop another major airport.2

However, the request from Delta didnot seek determination of the airport, but a subset of its facilities. Whendealing with a number or group offacilities that form part of a naturalmonopoly (as is the case in thisinstance), it will not be always clearwhether the separated facilities havenatural monopoly characteristics. For this reason the Commissionfollowed the approach outlined in itsDraft Guide to s. 192 of the AirportsAct. That guide suggests that thefollowing tests should be applied:

• Could the facility be provided atan off-airport location?

• Could the facility be provided atanother airport? and

12

• Could the facility be economically duplicated on site?

In assessing the service against those tests, the draft determination foundthat he facilities used to provide theservice for the purposes of thisdetermination (including roads,landside/kerbside pick up and dropoff points, DMP and car park roads)cannot be provided off airport. Similarly, they could not be providedat another airport.

The third issue was given detailedconsideration in the draftdetermination. In addressing thequestion of whether these facilitiescan be economically duplicated onsite, as well as its own analysis, theCommission sought economic advice from the Network EconomicConsulting Group (NECG). Thatadvice suggested that the test goes to whether an access seeker caneconomically develop or duplicatethe facilities in question, not whetherthe facility owner can. Thissupported the Commission’s thinking on the issue of economic duplication.

By applying the tests it outlined in itsdraft guide to section 192, theCommission concluded that theservice of “the provision of landsideroads and associated vehiclefacilities for dropping off and picking up passengers at MelbourneAirport”, satisfies criterion (b).

Conclusion

In conjunction with its interpretationof the legislative provisions, theassessment of the service againstcriterion (a) and against criterion (b)has the effect of declaring theprovision of landside roads andassociated vehicle facilities fordropping off and picking uppassengers at Melbourne Airport.

But the decision is a draft decision atthis stage. The Commission hascalled for further comment frominterested parties prior to releasing its final decision on Delta’s request. Itanticipates that the final decision will

be available to the public in six toeight week’s time.

As noted above, this draft decisionpotentially has consequences forboth the access seeker (Delta CarRentals) and Melbourne Airport. Itmay also have consequences forthird parties seeking access to thedeclared service. Any partiesinterested in this particular accessissue can obtain a copy of the draftdetermination from the Commissionby contacting Ms Kate Menzel on(03) 9290 1856. Any partiesinterested in access issues atprivatised airports more generally are encouraged to contact theCommission staff in the Aviationsection in its Melbourne Office on(03) 9290 1820.

Contact Margaret Arblaster ACCC03 9290 1862

1 Australian Competition and ConsumerCommission, 'Draft Gude Section 192 ofthe Airports Act — declaration of airportservices', (1998). Discussion pp 3–4.

2 Ibid

Developments inSouth Australia

Access Arrangementfor MetropolitanAdelaideThe Access Arrangement for the gasdistribution system in South Australiaincluding Metropolitan Adelaide andRegional South Australia wassubmitted to the South AustralianIndependent Pricing and AccessRegulator by Envestra Limited onMonday 22nd February 1999.

Copies are available from SAIPAR ata cost of $25.00 or through theInternet site at www.saipar.sa.gov.au.

The consultation process hascommenced. SAIPAR has invitedsubmissions from interested partiesas advertised in “The WeekendAustralian” on Saturday 6th March. Submissions are due by the 31stApril. Public Hearing(s) will be heldin the week beginning the 19th April1999. The venue and time will beannounced.

After consideration of all submissions received it is anticipated that SAIPARwill announce its Draft Decision inrespect of the Gas AccessArrangements by July.

Contact: Graham Scott SAIPAR 088226 5788

Developments inWesternAustralia

Sale of AlintaGasThe Western Australian EnergyMinister announced on 23December 1998 the CoalitionGovernment’s decision to sell theState’s gas utility, AlintaGas, which is expected to occur in the first half ofthe year.

A sale steering committee, workinggroup and support arrangementshave been established to work on the first-stage of a two-stage saleprocess.

By mid-year the AlintaGas SaleSteering Committee will recommendto the Government an appropriatestructure, method and timing of the

13

sale to achieve an optimum saleprice, while protecting the interests of gas customers and the State. Thesale would include AlintaGas’ retail,trading and pipeline distributionsystem.

AlintaGas was established in 1995from the split of the State EnergyCommission of Western Australia(SECWA) into AlintaGas and Western Power. Its sale will:

• improve consumer choice through increased competition;

• maximise the value of thebusiness to the Government andto all Western Australiantaxpayers;

• minimise the Government’sexposure to the business risks ofcompetition;

• reduce the burden onGovernment resources andrelease capital for other purposes;

• open new market opportunitiesfor the business which might notexist under Governmentownership; and

• provide the best available optionfor delivering lower gas prices.

Regional electricityaccess accelerated inWAThe accelerated electricity distribution networks access policy announcedlast year for Western Power’snon-interconnected regional areascame into effect on 1 January 1999.

Within the 29 non-interconnectedregional areas, customers whoconsume above 300 000 kWh ofelectricity annually at a single sitehave the right to choose analternative electricity supplier ifavailable.

Under the original proposal forregional access and access to theinterconnected networks announcedin 1997, customers of 1 MW or

more would have had access after 1January 2000. Access has beenavailable to customers of 5 MW ormore since July 1997.

Under the accelerated regionalaccess policy, the consumptionthreshold has been significantlyreduced and the date broughtforward for regional areas. Thismeans a large number of contestable customers are now eligible to obtainsupply from alternative sources suchas independent power producers.

Contact: Richard Harris, OOE, (08) 9327 5656

Pipeline Access Actnow lawWith the proclamation of the GasPipelines Access (WA) Act 1998, anOffice of Gas Access Regulation(OffGAR) has been established inWestern Australia. On the 26February 1999, the Minister forEnergy announced the appointmentof Dr Ken Michael as the actingIndependent Gas Pipelines Regulator for both gas transmission anddistribution pipelines in the State. The Regulator is also the ChiefExecutive Officer of OffGAR.

Dr Michael holds a Bachelor ofEngineering degree with first classhonours from the University ofWestern Australia and is a Doctor ofPhilosophy from the University ofLondon.

Having recently retired as the ChiefExecutive Officer of Main RoadsWestern Australia, Dr Michael hasextensive experience in managinginfrastructure similar to that of gaspipelines. Dr Michael is also aformer Public Service Commissioner(1993 – 1994) - a position he heldconcurrently with that ofCommissioner of Main Roads.

Dr Michael was appointed a Member of the General Division of the Orderof Australia in the 1996 AustraliaDay Honours. He is currently

Chairman of Commissioners of theCity of Albany, Pro-Chancellor of the University of Western Australia andChairman of the Board of Trustees of the Western Australia Museum. DrMichael is a Fellow of the AustralianAcademy of Technology Sciencesand Engineering; an HonoraryFellow of the Institution of Engineers,Australia; a Fellow of the CharteredInstitute of Transport, Australia; anda Fellow of the Australian Institute ofManagement.

The Gas Pipelines Access (WA) Lawhas been enacted as complementarylegislation having an essentiallyidentical effect to the Gas PipelinesAccess Law enacted as schedules tothe South Australian legislation.

The Western Australian legislationalso provides for the resolution ofdisputes by the establishment of theWestern Australian Gas DisputesArbitrator and a mechanism ofappeal by the establishment of theWestern Australian Gas ReviewBoard.

The Office of Gas Access Regulationprovides support to both theIndependent Gas Pipelines AccessRegulator and the Arbitrator. Further information on the operation of theregulatory regime may be obtainedfrom the OffGAR website the address for which is:http://www.offgar.wa.gov.au/

Contact: K Peter Kolf, ActingExecutive Director, OffGAR,08 9268 2467

14

Developments inNew SouthWales

Electricity

Special Refeence on Electricity

This review covers pricingrecommendations for electricityservices for transmission anddistribution and franchise supplybased on the application of theNational Electricity Law and theNational Electricity Code. PublicHearings were held in December1998 and report is due by the end of April 1999.

As part of the public consultationprocess for this review, a series ofdiscussion and research papers arebeing released. The followingpapers have been released to date:

• Pricing for Electricity Networksand Retail Supply - Issues Paper

• The Rate of Return for ElectricityDistribution Networks - Discussion Paper

• NSW Transmission Network -Service Pricing and RevenueRegulation Reviews - Statement of Process - IPART and ACCC

• Contestability for Residential andOther Low Use ElectricityCustomers - prepared for IPARTby SRC International Pty Ltd

• Capital Expenditure Review inNSW Electricity Distribution - Final Report - prepared for IPART byWorley (Maps)

• Capital Expenditure Review inNSW Electricity Transmission -Supplementary Report onTransGrid - Final Report -prepared for IPART by Worley

• Rolling Forward the RegulatoryAsset Bases of the Electricity andGas Industries - Discussion Paper

• Regulation of Electricity NetworkService Providers - Incentives andPrinciples for Regulation -Discussion Paper

• Efficiency and Benchmarking ofNSW Electricity Distributors -Discussion Paper

• Efficiency and benchmarkingstudy of the NSW distributionbusinesses - Research Paper-prepared for IPART by LondonEconomics - Appendix 1 andAppendix 3

• Summary Report of 1998Distribution Benchmarking -Research Paper - prepared forIPART by UMS Group

• Regulation of Electricity NetworkService Providers - Price ControlIssues and Options - DiscussionPaper

Copies of these papers are availablefrom the Tribunal’s website(www.ipart.nsw.gov.au).

Water

Gosford and Wyong WaterSupply

A three year price path for water and related services for Gosford andWyong Councils ends in June 1999. Pending a review of developercharges for urban water agencies,one year prices will be set for1999/2000, with a further mediumterm price path being set in thefollowing year.

Sydney Water CatchmentAuthority

Following recent problems withSydney’s drinking water quality,recent legislation has created theSydney Water Catchment Authority(SCA) which will be responsible forthe supply of bulk to Sydney WaterCorporation. The legislationprovides for the Tribunal to assistwith initial arrangements associatedwith the creation of the newauthority. It also determines that

SCA’s services can be declared asgovernment monopoly services sothat they may in future be subject toprice regulation under the IPART Act.

Public Transport

CityRail and STA fares

Work has commenced on this yearsfare review with a determinationscheduled for late June 1999. Thisyears review will look at thepossibility of setting a medium termprice path for one or both agencies.

Review of Taxi Cabs and HireCars

This review is looking at the levels ofservice and competition in theseindustries and considering the extentof any restrictions imposed by thePassenger Transport Act, policies ofthe Department of Transport andindustry practices.

Public Hearings were held inNovember 1998 and an interimreport is planned for release at theend of April 1999. The final report is currently scheduled for around July1999, following a further PublicHearing to consider comments onthe interim report.

Review of Rail SafetyAccreditation Costs

This review considered recovery ofrail safety costs of by the industry’ssafety regulator, the Transport SafetyBureau from owners of rail track andoperators of rail services. The termsof reference ask the Tribunal torecommend an appropriatemethodology for the calculation ofaccreditation costs and anappropriate distribution of these costs amongst participants in the railindustry. A final report andrecommendations was released on11 February 1999.

15

Review of Aspects of the NSW Rail Access Regime

This Review examines some specificaspects NSW Rail Access Regimewhich was established in August1996. A draft report was releasedon 1 March 1999.

The draft report reflects the Tribunal’s preliminary assessment of theappropriate maximum rate of return,the asset valuation and depreciationmethodologies and the definitions ofcost terms which best balance thecompeting interests of RAC and itscustomers. Following considerationof comments, the Tribunal plans torelease the final report by 28 April1998.

Gas

Great Southern Networks –Access Arrangement

This is the first access arrangementthat the Tribunal has consideredunder the requirements of theNational Gas Code. A draft decision was released in October 1998 and a further Public Hearing to considercomments was held in November1998.

Having regard to the requirements of the Code and its objectives, theTribunal decided not to accept theAccess Arrangement proposal. TheTribunal did not accept the rate ofreturn and initial capital base valuesunderpinning the annual revenuerequirement and resultant pricesproposed in GSN’s AccessArrangement. It allowed a slightlyhigher rate of return than wasproposed in the draft decision,increasing the allowed pre-tax realrate of return from 7.5 to 7.75percent. This reflected the Tribunal’sassessment of the evidence andarguments put to it since release ofthe draft decision, includingarguments relating to risk andredundant capital policy.

The Tribunal has required GSN torevise the Access Arrangement in anumber of areas, covering bothrevenue and price outcomes as wellas some of the non-price terms andconditions for access.

Albury Gas Company – AccessArrangements

Consideration of this arrangement isnearing completion and a finalreport is planned for release duringApril 1999.

Wagga Wagga and Albury gastariffs

Joint public hearings have been held. Finalisation of this tariffdetermination is linked to thecompletion of access arrangementsfor these areas. A draftdetermination is expected to bereleased in the second quarter of1999.

AGL gas networks – Accessarrangements and tariffs

The first access arrangement for theAGL network made in July 1997 isdue to end in June 1999. AGL GasNetworks P/L lodged a proposednew access arrangement and accessarrangement information with theTribunal in January 1999. PublicHearings are planned for 31 Marchand 1 April 1999.

The Tribunal did not consider thatthe information fully complied withthe requirements of the National Gas Code. A notice was issued underSection 2.9 of the Code requiringAGL to supply revised information. AGLN supplied revised accessarrangement information in earlyFebruary 1999.

The Tribunal will be considering AGL network tariffs in conjunction with itswork on the access arrangement and tariff decisions will be made afterwork on the arrangement has beencompleted.

Other Reviews

Review of Fees forDevelopment Control Services

Two reports for this review have been released – Competitive Neutrality inPricing (December 1998) andMiscellaneous Fees (February 1999). A final report coveringnon-complying developmentapplications will be released in July1999, following an interim report inApril 1999.

Contact John Dulley, IPART02 9290 8484

Developments inTasmania

Government PricesOversight Commission

Bulk Water Investigation

The Commission’s investigation ofmaximum prices to be charged bythe three regional bulk watersuppliers was completed inDecember 1998. The Final Reportrecommended maximum chargesbased on a commercial rate of return on a depreciated optimisedreplacement cost asset valuation and progression towards nodal two-partpricing.

The authorities are at various stagesof cost analysis and pricingdevelopment. A key recommendation is the development of long-term asset management plans to identify futurescheme replacement andaugmentation requirements andfunding needs. These plans arerequired to be completed before the2001 review, with a view toimplementation of two-part pricing in the subsequent regulatory period.

16

Urban Water Consultancy

The Commission is currentlyengaged on a consultancy toinvestigate the cost-effectiveness ofthe application of two-part pricing for urban water services. This study ispart of Tasmania’s commitment tothe implementation of the COAGWater Reform Agenda. Theconsultancy will also develop a set of principles for long-term assetmaintenance plans and assetrenewals. These principles are toensure that councils can meet theasset maintenance and renewalsrequirements of the ARMCANZWater Pricing Guidelines whichunderpin the Strategic Framework for the Efficient and Sustainable Reformof the Australian Water Industry.

Contact: Andrew Reeves GPOC

Office of theTasmanian ElectricityRegulator

Tasmanian Electricity Code

The Tasmanian Electricity Codewhich took effect on 1 July 1998required a review of derogations by31 December 1998. Afterconsultation with Code Participantsand other interested parties, theRegulator has released revisedderogations. The derogationsrecognise that the industry is in astate of transition towards fullcompliance with the Code, but alsorecognise that important aspects ofthe Code may also be reviewed.

There will be major changes in theTasmanian electricity sector over thenext few years and furtherdevelopment of the Code will berequired. For example:

• The Code has been drafted in the expectation of interconnection ofthe Tasmanian and southern andeastern Australian electricity gridand Tasmania’s participation inthe National Electricity Market. Inaddition to interconnection, other

developments will, ifimplemented, have a majorimpact on the generation sector in particular. The proposal for theestablishment of a magnesiumsmelter at Bell Bay also includes a proposal for the supply of naturalgas to Tasmania from Longfordand the conversion of the Bell Bay thermal power station to naturalgas for base load generation. The Regulator has foreshadowed amajor review of the Code whenthe future of these proposals,including interconnection, isdetermined.

• The Code was drafted in theexpectation of a competitivemarket in electricity generationand in retail supply. TheGovernment has not yetestablished a timetable forimplementation since policy in this regard is related tointerconnection and participationin the National Electricity Market.

• The Government has recentlycommissioned a review of thestructure of the Hydro-ElectricCorporation generating activitiesand system control function. Thisreview is required by the NationalCompetition Policy and will assistdecisions on the future structureand regulation of the Tasmaniangenerating sector.

The Regulator has foreshadowed amajor review of the Code when thefuture of these proposals, includinginterconnection, is determined.

Licensing

The 1 July 1998 reforms included the creation of separate corporations forgeneration and system control(Hydro-Electric Corporation),transmission (Transend Networks PtyLtd) and distribution and retailactivities (Aurora Energy Pty Ltd).Licences have now been issued forTransend and Aurora. These licences required the establishment ofcompliance and management plans(now in preparation) for electricity

and customer services. The plansalso include the reporting regime forperformance assessment.

Prices Investigation

The Regulator is conducting aninvestigation of the maximumcharges for five monopoly services — generation, system control,transmission, distribution and retail— to apply from 1 January 2000.This investigation was commenced by the Government Prices OversightCommission in April 1998 inanticipation of the sale of Transendand Aurora by the previousGovernment. The investigation wasdeferred following the change ofGovernment in August 1998 and inlight of the policy of the newGovernment to retain publicownership of the entities. New termsof reference are yet to be received.

Reliability and NetworkPlanning Panel and CodeChange Panel

The Reliability and Network PlanningPanel and a Code Change Panelhave been appointed, each underthe Chairmanship of Mr BobRutherford, Director of the Office ofEnergy Planning and Conservation.The responsibilities of the Reliabilityand Network Planning Panel include:

• determining system security andreliability standards for thetransmission and distributionnetworks;

• reviewing of augmentation andother capital expenditureprograms of network serviceproviders;

• considering a priority loadshedding schedule;

• monitoring, reviewing andreporting on industry performance concerning network reliability;and

• recommending changes to theTasmanian Electricity Code.

17

Appointments to the Panel includerepresentatives of Code Participantsand of electricity consumers.

Contact Andrew Reeves,OTTER 03 6233 5665

ACT Independent Pricing andRegulatoryCommission

ACTEW SaleThe major event in the ACT relatingto regulation and structural reform isperhaps the failure of the proposal to sell ACTEW. The proposal entailedtwo parts, sale of the electricitydistribution business and franchisingthe water and sewerage business. The revenue expected from the salewas in the order of $1.2 billion. While the sale proposal foundered,the other aspect of the process is stillproceeding: comprehensive reformof the utilities regulatory framework.

A Statement of Regulatory Intent waspublished late in 1998, providing anoverview of the proposed regulatoryregime and the underlying principles. The statement accords with the ACT’s obligations under nationalcompetition policy and the relatedreforms in electricity, gas and water. The reforms are intended to provideadditional and clearer mechanismsfor consumer protection in cases ofeither market or regulatory failureand a social safety net. Theregulatory regime is being markettested in March with public debateand broad consultation with industryand community organisations.

By June, the taskforce responsible for delivering the reforms is due to return to the Legislative Assembly with asuite of new legislation to replace the existing law regulating electricity,

water and sewerage. The newutilities legislation will not decreasethe regulator’s responsibilities.

New Model forindependentregulation in the ActThe delivery of utilities Bills forconsideration in the LegislativeAssembly in June 1999 will includethe amendments proposed in thenew model for independentregulation in the ACT. The modelagreed for the new independentregulator to expand the role andfunctions of the existing IndependentPricing and Regulatory Commission,and provides for the first time apermanent secretariat for theregulator. Other changes includeadditional part time assistantcommissioners and provision forappointment of associatecommissioners for particularinquiries.

The model has been scrutinised bythe Legislative Assembly PortfolioCommittee for the Chief Minister’sDepartment, which supported thedirection of the proposal whilecommenting on some of the details. The new regulator will retain thepricing and access regulationfunctions, and the new utilitiesfunctions plus have a range ofgeneral regulatory responsibilitiesincluding ensuring that regulationmeets consistent quality andeffectiveness standards. The newproposal includes significant powerswhere references are concerned,including references from outsidegovernment and the power to selfreference.

WaterIn December 1998 the Assemblypassed the Water Resources Bill1998, thereby meeting the ACT’sobligation under the COAG waterreform framework. One of theinteresting features of the new Act isthat it provides for charges to be

applied to water reflectingenvironmental costs and a scarcityvalue for water that have hithertobeen impossible. These arepass-through charges for which theregulator is not responsible. Theeffect of the increase in charges is toraise revenue for environmentalworks not currently linked to watercatchment management or levelsconsumption. They will add to therange of incentives for waterconservation being built into theprice for water, which is generallyregarded as below the economiccost.

InquiriesIPARC is currently engaged in anumber of inquiries. The inquiry into electricity, water and seweragepricing is in the public consultationphase, a draft price direction hasbeen issued and public hearings areabout to commence. The inquiryinto ACTION bus pricing is at asimilar stage, a draft direction hasbeen issued and consultation isexpected to commence shortly. Boththose inquiries are due to concludein May. Other inquiries expectedwithin the next several monthsinclude pricing for taxis andconsideration of some pricing issuesrelating to the retail price of milk.

The Gas access inquiry, involving the access arrangements for the AGLpipeline are still current. At the same time, the NCC is consideringcertification of the ACT’s accessregime, a decision on certification isexpected before June.

Contact: Ian Primrose, Office ofFinancial Management, ChiefMinister’s Department, tel: (02) 6207 5904.email:ian_primrose@dpa.act.gov.au

18

Newsbriefs

Howard SmithTowage at the Port of Melbourne

Background

On the 21 January 1999 HowardSmith Towage lodged a pricenotification for harbour towageservices at the Port of Melbourne. Howard Smith proposed to increasetowage rates at Melbourne by aweighted-average of 17.5 per cent. In arguing their case Howard Smithpointed out that the nominal price oftowage in the Port of Melbourne had not been increased since 1987. Furthermore Howard Smith arguedthat they had introduced a number of service enhancements which havebenefited port users but which havehad an adverse impact on their ownprofitability.

Procedure

The Commission in assessing pricenotifications has particular regard toSection 17 (3) of the PricesSurveillance Act, subject to anydirections under Section 20. Withregard to section 17(3) theCommission directs its attention to

the efficiency of the cost base thatthe declared company is workingfrom and the reasonableness ofthe rate of return that thecompany is seeking.

To assess this notification theCommission used a new procedurewhich was developed in early 1998and which is set out in theCommission’s Draft Statement ofRegulatory Approach to PriceNotifications. As part of thisprocedure Howard Smith lodged adraft notification with theCommission in late 1998 and theCommission released a ‘PreliminaryStatement of Reasons’ in response on the 21 December 1998. In reply to

this statement the Commissionreceived one joint submission fromthe Australian Chamber of Shippingand Liner Shipping Services(ACOS/LSS). After Howard Smithsubmitted its formal notification apre-decision conference was held on28 January 1999, which wasattended by a number of industryrepresentatives. The Commissionreleased its final decision on the 25February 1999.

Commission’s Findings

The Commission decided that on the evidence available Howard Smithwas offering an enhanced service,which provided savings to a numberof users and increased portefficiency. The impact on HowardSmith of providing these services had been both to increase costs andreduce revenue. The Commissiontherefore agreed that a price rise was necessary to return Howard Smith toprofitability. However, theCommission had concerns about thelevel of the price increase required,especially considering HowardSmith’s measurement ofdepreciation. Howard Smith’sestimates for an appropriate rate ofreturn were based on the marketvalue of assets of the firm. TheCommission therefore suggested that a market value based depreciationrather than accountancy baseddepreciation should included used. The use of an economic depreciation meant that a price rise in the range10-12 per cent rather than thesuggested 17.5 per cent would beappropriate.

Concerns were also expressed aboutthe investment by Howard Smith in anew tug which embodies oceangoing and salvage capabilities. TheCommission calculated that if aharbour tug rather than an oceangoing tug had been purchased thena 10 per cent price rise would leaveHoward Smith with a rate of return,which was deemed reasonable.

Contact Anne Plympton ACCC03 9290 1861

19

20

ContactsACCC Regulators Forum issues Joe Dimasi (03) 9290 1814

Newsletter Katrina Owers (03) 9290 1915Telecommunications Michael Cosgrave (03) 9290 1914Airports Margaret Arblaster 03) 9290 1862Electricity Michael Rawstron (02) 6243 1249Gas Mark Pearson (02) 6243 1276Internet address http://www.accc.gov.au

NSW IPART John Dulley (02) 9290 8484Internet address http://www.ipart.nsw.gov.au

VIC ORG John Tamblyn (03) 9651 0223Internet address http://www.reggen.vic.gov.au

TAS Govt Prices Oversight Commission Andrew Reeves (03) 6233 5665Internet address http://www.gpoc.tas.gov.au

Office of the Tasmanian Electricity Regulator Andrew Reeves (03) 6223 5665

QLD Queensland Competition Authority Mr John Hall (07) 3222 0500

WA Office for the Gas Access Regulator Dr Ken MichaelInternet address http://www.offgar.wa.gov.au

Office of Water Regulation Dr Brian Martin (08) 9213 0100Internet address http://www.wrc.wa.gov.au/owr

SA SAIPAR Mr Graham Scott (08) 8226 5788Internet address http://www.saipar.sa.gov.au

Electricity Reform and Sale Unit Patrick Walsh (08) 8204 1287

Office of Energy Policy Cliff Fong (08) 8226 5512

ACT Chief Minister’s Dept, Ian Primrose (02) 6207 5904Office of Financial Management Economics Branch

Produced by the ACCC